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Estates & Wills & Trusts, Tax

Goals, objectives, tax considerations paramount when choosing a trust

Trusts are “purpose-driven” vehicles that can be beneficial in a number of circumstances, but it is important for individuals and families to begin by reviewing their goals with a lawyer to determine which type of trust may work best in their situation, Calgary tax and fiduciary services lawyer Dennis Nerland tells AdvocateDaily.com.

Choosing a type of trust largely depends on factors such as health, age, geographic residence, location of assets and stated intentions, says Nerland, a founding partner of Shea Nerland Law and leader of the firm's tax and estate planning practice.

For example, an individual — referred to as the “settlor” — may wish to create a trust for the care and living expenses of a disabled family member, or set aside funds to help a grandchild attend university. A trust can also be used to assist in succession planning for future generations, or any number of non-charitable or charitable goals.

As Nerland explains, clients over 65 have unique planning considerations, as they are contemplating their retirement needs as well as planning for the next generation. For some, a trust may also be used to help transition their personal finances as they age.

“Many individuals do not always contemplate their increased reliance on professionals, caregivers, family and friends as they grow older, and trusts are an effective way to plan for these years and to provide assistance,” he says.

Alter ego trusts can be effective for clients over age 65 as they transition their wealth, says Nerland, as this type of trust allows the settlor/beneficiary to use their property during their lifetime and transfer it to beneficiaries upon their death outside of probate. A joint partner trust mirrors the alter ego trust except that both the settlor and their spouse are permitted beneficiaries.

“In order for the trust to qualify for the alter ego status, you must be entitled to receive all of the income, and no one except you may receive any income or capital until you die,” he explains.

“If all of your property is transferred to these vehicles, they can reduce the burden placed on family members acting under a Power of Attorney. This is because you manage very little, as the management is carried out by your trustee(s),” says Nerland.

In a blended family situation, Nerland says spousal trusts are popular and can be effective in protecting assets and providing care for a spouse or partner, depending on their circumstances.

Elsewhere, a properly structured family trust can allow individuals to split income among several beneficiaries instead of reporting all the income personally. It has historically been used as a method of multiplying your enhanced capital gains exemption.

“Where these beneficiaries have a limited income, their tax rates tend to be substantially lower, thus resulting in a significantly less tax burden,” says Nerland.

Also, when there is a concern that an heir who receives a large sum of money may lose their assets — to creditors, to an estranged spouse, or to those who prey on those who lack experience and judgment — transferring the assets to a family trust can help ensure they remain under separate control.

“The funds can be paid out to your heirs as beneficiaries of the trust to satisfy living expenses or to provide additional income from time to time,” says Nerland.

And, a wealth accumulation trust strategy can lower taxes, produce steady guaranteed annual income, while helping a favourite charity.

Under this strategy, the settlor gives to their chosen charity and establishes an irrevocable living trust that ends their ownership of the donated assets. The trust also acts as protection against creditor attack.

“The terms of the trust provide that the trustee’s sale and reinvestment of those assets will produce an income for life for you. You will also receive a charitable tax receipt which will enhance your current after-tax cash flow,” says Nerland.

Ultimately, a lawyer can assist individuals and families in deciding if and what type of trust would be beneficial to their circumstances by doing a full review of the stated goals and purposes they wish to achieve.

“The lawyer should consider family dynamics and financial circumstances, consider any special needs such as spendthrift family members, in addition to always being attentive to alternate planning opportunities that may meet the client’s goals more effectively,” says Nerland.

A lawyer will also outline the potential tax benefits and consequences in light of the client’s stated goals and objectives and assist them in assessing their options, he adds.

When it comes to setting up a valid trust, there are a number of required technical and practical steps.

“To constitute a trust, an individual, known as the ‘settlor,’ gifts an asset or property to a second individual, known as the ‘trustee,’ for the care and management for the benefit of a third party, known as the ‘beneficiary,’” says Nerland.

One technical requirement is that the settlor must have legal title to the asset or property, and they must transfer the ownership to the trustee completely.

Although no written document has to exist reflecting this relationship, Nerland says it is prudent and strongly recommended to outline the terms and conditions governing the trust relationship.

“In the case where no written document exists, the court may determine that a trust exists, however, providing there are specific legal requirements that must be met. Specifically, there must be a clear class of beneficiary, a clear intention to gift, and the property subject to the trust relationship is ascertainable,” he adds.

Although trusts can be beneficial for a number of purposes, they do require annual administration and review, says Nerland, which may not be cost-effective in the case of small and inefficient trusts.

“The tax effectiveness of trusts are largely influenced by changes in the Income Tax Act, which is amended often. As such, regular review and analysis are required,” he notes.

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