Table of Contents
- What is a Trust?
- How Does a Trust Protect Your Assets?
- Importance of Preserving Family Wealth
- Overview of Trusts as a Strategy for Wealth Protection in Canada
- Different Types of Trusts and How They are Used for Wealth Protection.
- Benefits of Using Trusts for Wealth Protection
- Determining Trust Structure and Terms.
- Answers to Some of Your Questions on Trusts
- Challenges and Limitations of Using Trusts
- Bottomline
Trusts are a tool that grants massive protection to family wealth.
The primary security they provide is from unwanted lawsuits.
Similarly, they keep the assets together and prevent the disintegration of the estate.
There are many other reasons why families and individuals widely use trusts as a family wealth protection tool.
This writing discusses various aspects of wealth protection through trusts at length.
What is a Trust?
A trust is an entity in which a person(settlor) transfers his property to another person(trustee). The second person holds this property for the benefit of named beneficiaries, which may include the settlor himself.
How Does a Trust Protect Your Assets?
A trust comes into being through property transfer from the owner to the trustee. In this way, neither the owner nor the beneficiaries are the owner anymore. Suppose a lawsuit arises against the beneficiaries or the settlor. In that case, it cannot be settled against the trust assets because they are not in anyone’s ownership now and are trust property.
Similarly, a trust keeps the assets bound together and prevents the disintegration of the estate that can happen due to “whimsical” family members selling their shares.
Likewise, smooth intergenerational transfers and probate-free rollovers make trusts a reliable wealth protection tool.
Moreover, a trust yields a steady flow of income without affecting the primary assets, thus protecting them.
Sixthly, a trust, through income division, attracts a lower tax bracket, in this way there is minimum tax liability on the family wealth.
Seventhly, if there are family members who cannot take care of their own shares and their shares are likely to be sold by them in return for a one-time benefit, a trust protects those assets by keeping them together and feeding such family members.
Eighthly, trusts are protected against asset seizure and turnover orders. It means, the property lying in a trust cannot be utilized to satisfy court verdicts.
Importance of Preserving Family Wealth
Following are the reasons why the preservation of family wealth is essential:
- Generational Wealth Transfer without losses
- Financial Security for the estate
- Legacy Building
- Stability and Independence
- Opportunity Creation for further expansion
- Strengthening of Inter-Generational Relationships
- Philanthropy and Social Impact
- Protection Against Inflation and Taxation
- Bar against lawsuits
Overview of Trusts as a Strategy for Wealth Protection in Canada
“The authors tell us 80% of beneficiaries view trusts as a burden, yet over 90% of family wealth is tied up in some form of a trust by the time of the third generation”.
-Thomas Livergood
Trusts in Canada present many avenues that a person can access to protect a family’s wealth.
These include protection from sale by individual family members, smooth inter-generational transfer, and prevention from disintegration.
Different Types of Trusts and How They are Used for Wealth Protection.
- Testamentary Trusts
These are trusts created through a testament. Simply put, they are trusts born out of a will. The difference between inter-vivos and testamentary trusts is that, unlike inter-vivos trusts, testamentary trusts do not operate or exist during a person’s lifetime. Instead, they come into being only after the death of the willmaker.
- Inter Vivos Trusts
Inter vivos means: Between living men.
As apparent from the term, Inter vivos trusts are those created within a person’s life. They can be instrumental in acting as a more concrete form of ‘will.’ They allow family wealth to reach heirs without probate and interruption.
- Discretionary Family Trusts
A discretionary family trust is one in which the trustee can decide how and when to distribute trust property among the beneficiaries.
Consider the following two cases of how trusts are much more efficient as a wealth management tool than the family members themselves:
John’s father creates a trust (non-discretionary). The trust deed directs the trustee to devolve the assets when “John feels like it.” It is likely that the moment the inexperienced John gets his share of wealth, that wealth will soon be gone.
Consider another case: John’s father leaves behind a “discretionary trust.” The trustee is to decide when to give John his due share. Meanwhile, John marries a girl in his street. The relationship fell apart within a week, and now she is filing a suit for her share in John’s assets. Fortunately, the assets are still in the Trust and are fully protected from claims against John. In this way, a trust deed written well can be much more reliable than a human being.
- Discretionary Spendthrift Trusts
Discretionary spendthrift trusts allow trustees to decide when and how trust assets are distributed to beneficiaries, allowing for tailored support. Such trusts specifically aim to protect vulnerable beneficiaries.
Such trusts ensure that instead of devolving assets to young ones with low financial experience, the trustee ensures a steady flow of income to them, providing financial support to vulnerable family members while keeping the estate intact.
- Bare Trusts
These are trusts in which the trustee has absolute right over income and disposal of the assets. Such a trust is another foolproof method of avoiding probates and devolving assets to a spouse or young children while saving taxes and securing wealth.
- Alter Ego Trust
This Trust allows the settlor, aged 65 or older, to receive all the income during their lifetime. It allows his family wealth to stay intact and enables him to enjoy tax-free luxuries until his death.
Benefits of Using Trusts for Wealth Protection
- Why you need protection from lawsuits against your wealth
- Millions of new lawsuits will be filed this year alone.
- Almost triple those filed 30 years ago.
- Any of us could be the next target.
- Risk factor analysis (RFA) suggests that you could be at risk of claims.
- One new lawsuit every 1.5 seconds...
- So, creating Trust is more of a necessary safeguard than a precaution.
- Estate Planning Benefits, Including Probate Avoidance and Privacy
Following are some notable wealth protection facts attached to a trust:
There are no Interruptions in Income, thus keeping family wealth growing.
Protection of wealth against extravagant family members is another crucial means to protect family wealth.
The well-being of weak family members.
It helps avoid probate.
It maintains the privacy of transactions.
- Prevents Scattered Administration of the Estate
The existence of a trust ensures that if your assets lie at different places, they see their administration all in one place and do not get scattered. In this way, it ensures that your family’s whole estate remains intact.
- Ensures Smooth Functioning of Business
The death or incapacity of the settlor, trustee, or beneficiary cannot affect the Trust’s smooth functioning. It leads to the preservation and continuous growth of wealth.
Similarly, it is a more concrete means than a Will because a will is open to being challenged by disputing claimants, while the presence of a trust is a more concrete setting.
- Prevention Against Duress
It allows passing down of wealth without the intricacies a Will can breed. In a will, everything is in documents, which needs creation. In a trust, everything is already an existing reality.
A trust further checks instantaneous selling by any family member and keeps the family’s wealth safe.
- Pass on Assets to Your Spouse Confidentially and Economically
When a Settlor transfers their assets to an inter vivos trust for their spouse’s benefit, at their death, the assets will see a tax-free rollover and a complete transfer of assets without liabilities.
Determining Trust Structure and Terms
Technically, trusts other than those involving land do not need to be in writing. However, practically, the trusts used by wealth owners are always in writing.
The most common document is a trust deed. It states the names of the Trust’s creator, the settlor, and the trustee.
It is valid even if signed only by the trustee.
Answers to Some of Your Questions on Trusts
- Revocable or Irrevocable?
Most people want to retain the path of getting their assets back open.
Others believe they should rather never have it back.
You can decide as per your circumstances.
- Is a Trustee Liable for Your Loss?
Liability is high since no legal entity comes into being (trusts are an informal contract). Trustees design trust documents to minimize their liability. However, a trustee is the owner of the assets, and if there are lawsuits, the trustee will be in the firing line.
- What Happens if Your Trustee Refuses to Distribute the Assets in line with the Trust Deed?
The beneficiaries can sue him and recover their respective shares. Their shares are protected by the law.
- Can a Settlor Express His Wishes in Case of a Discretionary Trust?
A trust document often contains a non-binding record of the settlor’s wishes, which the trustee and the court can also look at. Whereas, in a discretionary trust, the settlor’s wishes are not binding, and if the trustee refuses to divide the shares as he wishes, the beneficiaries cannot force him.
Challenges and Limitations of Using Trusts
- Costs Associated with Trust Establishment and Administration
- Legal Fees
- Trustee Fees
- Accounting and Tax Preparation Fees
- Asset Transfer Costs
- Registration Fees
- Appraisal Costs
- Trust Administration Software or Services
- Moral Considerations
Different individuals may have a different approach to morality.
Should you not let any creditor access your assets even when there is a legal reason?
This is a moral consideration that the court can decide on, and courts generally consider moral reasoning.
Is it justified that someone borrows money, and the lender cannot recover it through his property if he doesn’t pay him back?
These are some questions for the courts, legislatures, and the people to decide.
However, some of the issues have already been addressed. One of those is Fraudulent Conveyance.
- Fraudulent Conveyance While Trusts provide robust protection, they are not impervious to challenges arising out of fraud and malicious intent. Fraudulent Conveyance refers to the transfer of assets into a trust with the intent to obstruct, defraud or delay the creditors.
In such a case, the court can invalidate the protections of a trust.
- Complexity of Trust Structures and Legal Requirements Deemed dissolved after 21 years.
The condition of permanently losing control over your property is in an irrevocable trust.
- Potential Conflicts Among Beneficiaries
A trust is a powerful tool that often turns beneficiaries into trust fund babies and creates resentments and rifts among family members.
-Angelo Robles
Disputes cannot be ruled out. If they do arise, Trust will become more of a forced marriage.
- Regulatory Changes Impacting Trust Taxation and Administration
In the case of trusts, there is the highest marginal tax bracket for undivided income.
Disclosure Law was introduced in 2018 and expanded to bare trusts in 2023. As per FATF recommendations of 2014, more disclosure is now a requirement.
Bottomline
Trusts are a great tool for managing family wealth. However, due to changing legal requirements and rules, it is recommended that you consult a professional advisor to design the right form and structure of Trust for you.