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Trusts

Protecting your family through trusts
A trust is a unique way to hold property. If structured properly, a trust can:

  • provide asset protection for your family,

  • preserve your wealth and,

  • reduce taxes


A trust that is created during your lifetime is called an inter-vivos trust. A trust that is created upon your death under the provisions of your will or a trust declaration, such as life insurance trust, is called a testamentary trust. Some of the important features of these types of trusts are:

  • a trust is a taxpayer, it must file annual income tax returns,

  • income earned and taxed within an inter-vivos trust is taxed at the highest marginal tax rate (39% to 50% depending on your province),

  • income earned and taxed within a testamentary trust is taxed at graduated tax rates, like any other individual taxpayer


Testamentary trusts can be used to split income between the trust and a surviving spouse, child, grandchild, or any other beneficiary, with potential tax savings in excess of $10,000 per annum.
Your will can create and fund a family trust for each of your children and their family members. Your adult child could be appointed the trustee, with authority to distribute income and capital to the beneficiaries, on a discretionary basis.
On the other hand, inter-vivos trusts can be used effectively in tax planning during your lifetime, particularly if the trust terms are properly drafted, provide for flexibility, to avoid the attribution rules. For example, an inter-vivos trust for minor or adult children can result in:

  • reduction of capital gains tax otherwise payable by the trust, where the beneficiaries are minor children,

  • reduction of income tax on interest by transferring income to an adult child whose tax bracket is lower than that of the contributor and that of the trust



Other important advantages of using an inter-vivos discretionary trust are:


  • the recent low prescribed interest rates have created an opportunity to split other types of investment income among family members through the use of a prescribed rate loan to a family trust, and

  • protection from creditors and to some extent, family law claimants


Lastly, trusts can be used as part of the planning for a disabled family member. If you have a loved one who is financially dependent on you due to a disability, you may want to consider setting up a discretionary Henson Trust, which, if properly drafted, can provide:

  • financial security by way of a 'back-up' source of funds in case additional support is required for an individual who is not capable of earning sufficient income or managing their own money, because of physical or mental infirmity

  • without jeopardizing provincial benefits




The choice of a trustee of a discretionary Henson Trust is very important, since the trust may be in existence for many years, perhaps decades. The trustee should have a clear understanding of the nature of a Henson Trust, and he or she should have familiarity with the living requirements of the disabled beneficiary. For these (and other) reasons, it may be prudent to appoint a professional trustee.

The asset protection and tax planning opportunities provided by trusts makes them an attractive financial and estate planning tool. Trusts are extremely flexible and can be tailored to address specific needs.

Professional advice is essential when creating a trust. We can introduce you to an estate planning professional, in order to understand the potential benefits of using a trust in your family and financial structures.

BMO Nesbitt Burns publishes several articles that discuss the different types of trusts and how they may be used as part of your family's estate plan.