PROTECTING YOUR ASSET FOR THE FUTURE
Trusts can have many uses, including helping you preserve your assets by providing a trustee who will manage them on behalf of your beneficiaries. While there are many types of trusts, there are two which are often used a part of an estate plan. An inter vivos trust takes effect while you are alive as soon as you transfer assets to the trust. The testamentary trust doesn't take effect until after your death and your estate is settled.

With a trust, you as the settlor transfers your assets to the trust, where they are managed by a trustee. The trustee manages these assets according to the instructions in the trust document, on behalf of your beneficiaries.

Your beneficiaries might benefit from the trust on an on-going basis, for example by receiving regular income from the trust. Or they might benefit at a time you specify, such as when they turn 21, when they might receive a lump-sum payment from the trust for some or all of the remaining assets in the trust.

There are many reasons why you might want your assets to managed in a trust:

• if you have minor children who cannot legally manage assets
• if you have older children who may not be ready to handle a large lump sum responsibly
• if you have relatives who are incapacitated by illness or age and may not be able to take care of their own financial affairs
• if you want to earmark certain assets for a specific purpose, such as your children's education
• as a tax planning tool, either for income splitting or for reducing income and/or probate taxes on death
• as a creditor protection tool
• as a way to structure a gift to charity Unlike wills, trusts are private documents so they can also be used to transfer assets without them becoming a matter of public record.

To offset the fees associated with trusts, a minimum of $150,000 is generally recommended.

Inter vivos trusts
When you set up an inter vivos trust, or living trust, assets are transferred immediately to the trust and the trustee becomes responsible for managing the assets and investments within it. Inter vivos trusts can be useful if:

• you want to limit final taxes on your estate, since a trust freezes the value of assets at the time it is established
• you want to minimize probate taxes, as an inter vivos trust's assets do not pass through your will
• you need a more detailed document than a power of attorney or mandate to specify how your assets are to be managed if you become incapacitated
• you do not currently owe money to creditors but are interested in creditor protection
• you want a beneficiary (such as a spouse) to enjoy steady income from the assets put into a trust during his or her lifetime, then have the remaining assets transferred to a charity

An inter vivos trust can be established as a revocable or irrevocable trust. With a revocable trust, you have the power to dissolve the trust at any time and have all assets returned to you. With an irrevocable trust, you should not count on being able to change your mind.

TIPS ON TAX
When you transfer assets into an inter vivos trust, you may have to settle up with the Canada Revenue Agency for the taxes due on any taxable capital gains as of the date of transfer. If you are 65 or older, assets transferred to an alter ego trust are a notable exception.

The inter vivos trust pays tax each year at the top marginal rate on any income that remains in the trust. However, income paid out to beneficiaries is taxed in their hands at their personal tax rate. Every 21 years, assets that remain in an inter vivos trust are taxed as if they had been sold at fair market value. Assets transferred to an alter ego trust continue to be taxed at the settlor's personal tax rate.

Deciding on a trustee
You can choose one or two trusted friends or family members to act as trustee or co-trustees. If your situation is complex or you expect the trust to be in existence for many years, you may want to select a professional trustee, such as a trust company. Whichever route you take, you should pick a trustee who will act impartially, in the best interests of all beneficiaries.

Your trustee or co-trustees must:

• manage the assets in the trust, investing the money according to the rules in the trust agreement
• make payments to your beneficiaries, as specified by the trust agreement
• file annual income tax returns for the trust and make arrangements to pay any taxes due

If a trustee neglects any of the duties associated with the trust, he or she can be held personally liable for the resulting financial loss.

Testamentary trusts
Testamentary trust agreements are incorporated into your will, and the fee for preparing them is included in your lawyer's fee for drawing up the will.Your assets remain under your control during your lifetime. Only after your death are they transferred into the testamentary trust. To change the terms of a testamentary trust at any time while you are alive you simply revise your will.

Testamentary trusts can be used to:

• arrange for assets to be managed on behalf of minor children
• appoint a trustee to handle assets for a beneficiary who does not have the financial knowledge or capacity to invest for himself or herself
• provide on-going support to one beneficiary (such as a spouse) during his or her lifetime, then have your assets pass to another beneficiary (such as your children from an earlier marriage) rather than leaving them outright to that beneficiary and then having the ultimate distribution of those assets be subject to the terms of the first beneficiary's will.

TIPS ON TAX
Any taxes due on the assets will be settled up on the deceased's final tax return before the assets are transferred to the testamentary trust. The trust then pays tax annually on the interest and dividend income it earns; on capital gains, at least every 21 years with few exceptions. However, unlike an inter vivos trust, a testamentary trust's income is taxed on a graduated scale so it pays lower rates when its income is low, and higher rates when its income is high.

As well, setting up a testamentary trust can reduce the taxes paid after your death by using the tax bracket of the trust as well as the beneficiary's own personal tax bracket. Suppose you transfer $200,000 earning $20,000 a year into a testamentary trust on behalf of a beneficiary who already has an independent annual income of $60,000. Assuming the beneficiary doesn't need the trust income in one year, it can remain in the trust where it will be taxed at a lower tax rate than would be charged if the $20,000 was taxed in the beneficiary's hands on top of their own $60,000.

You can transfer any assets to a trust, including stocks, bonds, mutual fund units, real estate and private businesses.

How do I establish trust?
To set up a trust, you must consult a lawyer, preferably one who specializes in tax and estate planning. You can also speak to your financial advisor about the tax implications of both inter vivos and testamentary trusts.

Most trust agreements contain the following information:

• an explanation of why you are setting up the trust
• a list of assets to be placed in the trust
• the names of the beneficiaries, trustee or co-trustees, and back-up trustees
• the specific powers of the trustee or co-trustees
• what benefits the beneficiaries will receive
• when the beneficiaries will receive income and/or capital from the assets in the trust
• when and how the trust will be wound down

Anything you don't specify in your trust agreement will be determined by the courts according to your province's trustee act, or if you live in Quebec, the Quebec Civil Code.

What’s the cost?
Trusts are an important estate planning tool, allowing you to specify how and when your beneficiaries can access certain assets. However, the costs of setting up and maintaining a trust should be estimated in advance. They include set-up fees, legal fees, administration fees for as long as the trust is in existence, and fees when a trust is wound up. If you're appointing a professional trustee, make sure you ask for a list of all the fees that will be charged annually for the management of the trust and distribution of assets to beneficiaries.

Thank you to our estate planning expert
Mackenzie would like to thank Sandra Foster, author of You Can't Take It with You: The Common-Sense Guide to Estate Planning for Canadians, for her invaluable assistance.