A trust is an arrangement (the “Trust Deed”) whereby a person (the “Settlor”) provides assets (the “trust property”) to another individual (the “Trustee”) to take care of for the benefit of another (the “Beneficiary”). The creation of a trust is the creation of a separate taxable entity and must be minded as such.
Uses of Trusts
The uses of trusts are varied, but many people use trusts for the following reasons:
- in wills for providing for family members;
- to transfer significant assets via a family trust to avoid probate taxes at death or reduce income taxes; and
- a Henson trust can be used for the benefit of certain incapable individuals who are receiving Ontario benefits and are income restricted.
The above uses are some of many, but give an idea of the possibilities of when trusts are used.
Drafting the Trust Deed
The trust deed must be drafted to specifically describe the following:
- the beneficiaries;
- the trust property;
- the Trustees;
- the powers that the Trustees have; and
- the obligations and duties of the Trustees.
The trust deed should be specific enough to provide all the information that the Trustees require in order to fulfill their duties without any further discussion with the Settlor. The above-enumerated items must be decided by the Settlor prior to drafting the trust deed and in consideration of each of the other items.
Trusts can be fixed or discretionary. A fixed trust does not provide any discretion to the Trustees thereby not allowing the Trustees to make changes to the trust which may be necessary due to changes over the course of time such as a depletion of the trust property. A discretionary trust allows the Trustees to make decisions, which are defined and limited by the trust deed itself. It may allow the Trustees to pay out trust property early or switch investment vehicles in times of recession. All acts must be done for the benefit of the beneficiaries.
Choosing the Beneficiaries
The beneficiaries are chosen by the Settlor. It is a decision that is based on the intentions of the Settlor. The beneficiaries can be named by specific given name or can be defined by a class (i.e. to all my nieces and nephews). It is usual to have more than one beneficiary due to the fact that if a sole beneficiary dies or is no longer able to receive the trust property, the trust will be voided. Further if using a class definition of the beneficiaries, one must ensure that the class is adequately defined to ensure that the Trustees will know exactly who can benefit from the trust property. Throughout this article, “beneficiaries” and “beneficiary” will be referred to as “beneficiary”.
Choosing The Trust Property
The trust property is the property that is donated to the trust to be held for the benefit of the Beneficiary. The trust property can be distributed itself, but can also derive additional income that can be distributed to the Beneficiary subject to the terms of the trust deed. The original trust property can also be distributed or liquidated upon certain events occurring. This should be enumerated in the trust deed as well.
The Trustees can be individuals or institutions, like banks or trust companies, who will administer the trust for a fee. Compensation, for Trustees, is also discussed in the Trustees Act (Ontario). The Trustees should be willing and able to carry out the intentions of the trust.
Choosing the Trustees’ Obligations and Powers
The primary obligation of the Trustees is to carry out the intentions set out in the trust deed. The specific manner of fulfilling the primary obligation is also set out in the trust deed and the Act. The trust deed will supersede the Act and allow or disallow certain powers to the Trustees. Each power should be listed with a short explanation so that there is no uncertainty as to the abilities of the Trustees.
Enforcing a Trust Deed
The importance of a properly drafted trust deed is seen where a beneficiary enforces a trust deed that they believe does not provide the Trustees with the powers they have exercised or have made a decision outside of their discretion as allowed in the trust deed. This can be a simple misunderstanding that emanates from a poorly drafted trust deed. It can be extremely expensive and the litigation may even be paid from the trust property, depleting it in the interim. The Trustees in a case such as this may be personally liable, if they are individuals without insurance for this purpose, causing great stress and possibly a loss of personal assets.
If the Trustees are not truly independent of the Settlor via the trust deed, the trust can be considered a sham trust and be voided by the inspecting government. It is imperative that the trust deed be properly drafted to avoid this consequence.
Trusts have many uses and benefits, however, the trust deed must be drafted with such specifics that the Trustees do not require any further instructions, but also with such generality that the Trustees can use some discretion to alter the trust parameters to account for future changes. The above-referenced choices made by the Settlor must be carefully considered.
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