TrustsShow Table of Contents
A trust is a legal arrangement that allows a third party, or trustee, to hold assets on behalf of beneficiaries.
Common Types of Trusts
There are 3 common types of trusts that you are most likely to encounter:
- Living Trust — A living trust, officially known as an inter vivos trust, is a trust in which the decedent contributed assets while still living, and set terms for the management and eventual distribution of those assets. When the original owner of the trust dies, the trust simply continues to follow the pre-defined instructions, and does not normally need to participate in any probate process.
- Testamentary Trust — A testamentary trust is one that the will creates upon death, after the assets pass through the normal probate process. Testamentary trusts are usually established by the will to care for a minor child or a disabled relative, and often persist for some time. Such a trust may be managed by EstateExec, but it may make more sense for the long haul to use something like Quicken® or even a professional asset manager.
- Testamentary Spousal Trust — A testamentary spousal trust is a specialized form of testamentary trust that can enable assets to transfer from the estate at their existing adjusted cost basis (ACB), bypassing deemed disposition, and therefore deferring certain tax obligations.
See Canada Revenue Agency: Trusts for additional information.
Trustees & Executors
The document that establishes the trust also establishes a trustee, whose role is similar to the standard executor's role addressed throughout much of this guide. Just like an executor for an estate, the trustee for a trust is responsible for managing and distributing the assets, in this case in accordance with the terms of the trust.
The executor for the estate generally has no official control over a trust, per se, but it's common for the same person to be the trustee for the trust, and executor for the entire estate.
If you are the executor of an estate whose decedent created a trust, you should list the trust as an asset in the estate. Even though the trust will not be subject to probate, the estate and the decedent will still be responsible for tax implications of deemed disposition.
If you are the trustee of a trust, you may wish to create an EstateExec "estate" to manage the details of trust administration, so you can generate accounting reports specifically for the trust, deal with the trust beneficiaries exclusively, and so forth.
Even if you are both the executor for the estate and the trustee for the trust, you MUST NOT commingle funds between them. This doesn't mean that you can't track things together, but it does mean that you can't pay estate expenses with trust funds, or deposit estate cash into the trust account. While you could track everything from a single EstateExec account, it may make more sense to simply create one EstateExec estate for the trust, and one for the general estate (assuming you are handling both).
Similarities to Estates
Just like the executor of a will, a trustee must inventory the current state of assets held within the trust, and in some manner distribute those assets to the heirs. This may mean liquidating some of the assets to make the proceeds easier to partition, or to pay debts incurred by the trust, and it may mean coordinating with the heirs to understand who would prefer which assets, trying to make everything work out equitably and in accordance with the terms of the trust. Trust asset cost base is handled similarly to that of estate assets, with most assets being subjected to deemed disposition on distribution. Finally, trusts, like estates, must make annual income tax filings if income exceeds a small threshold.
Differences from Estates
Pre-existing trusts generally do not have to go through probate, and some trusts are shielded from creditors so you don't have to worry about notifying and paying the decedent's creditors. However, other types of trusts have additional legal obligations, for example, officially notifying the beneficiaries that you have assumed control of the trust.
Compensation of trustees is often similar to that of executors (see Executor Compensation), but there can be significant differences. For example, trustees are normally paid every year, while in most cases executors are paid once, at the end of the estate settlement (because trusts are expected to last for years, while estates are usually settled within a year).
In general, terms of a Trust may specify desired compensation for trustees (just as wills may specify desired compensation for executors), but these terms may be overridden by a judge, particularly if the duties of the trustee end up being substantially different from those contemplated when the trust was created, or if compensation in accordance with the terms of the trust would be inequitable or unreasonably low or high.
If compensation terms are not specified in the Trust documents, then province statute and court precedent set allowable trustee compensation according to the same criteria as used for estate executors (although as mentioned above, with more emphasis on the annual element of compensation). See Executor Compensation for province-specific details.