TRUSTS

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Creation of a Trust

A trust in general is created when the person who owns assets gives them to another person to be held and used for a particular purpose or by a particular beneficiary. The person who gives the assets is the settlor of the trust, and the person who holds and manages the assets is the trustee.

An express trust is created when three things are certain: the intention to create a trust, the assets that comprise the trust, and who the beneficiary of the trust is.

Express trusts can be set up for many purposes:

  • to invest a lump sum to provide ongoing interest for a beneficiary who might not have the interest or ability to handle investing it,
  • to give a gift to a beneficiary during the will-maker’s lifetime without the will-maker losing all ownership and control over the asset,
  • to control how the beneficiary receives the income,
  • to control how the capital is managed on behalf of the beneficiary,
  • for effective tax planning, or
  • for a combination of these purposes.

There are many types of trusts and they can have different tax treatments. They can be effective for tax planning, but you should get advice from a lawyer or financial planner about setting up or managing a trust.

There are resources to help set up trusts for persons with disabilities:

  • Disability Alliance BC[1] produces a fact sheet about trusts for persons with disabilities,
  • Coast Foundation[2] assists people who have mental disabilities to set up trusts (in Vancouver call the Trust Co-ordinator at 604-675-2321).

Investments

The estate may include investments held by the will-maker, or the executor may consider it would be prudent to invest estate assets before they can be distributed. There are rules about trustees investing trust assets.

If the will creates an express trust, it may specify or limit the trustee’s role. The will might create a non-discretionary trust where the trustee has no say in how the beneficiaries receive income. Such a non-discretionary trust might be used to guarantee a fixed payment of income or interest to the beneficiary. Or the trust might specify that the trustee has sole discretion over payments and investments of the trust.

Particular Trusts

Testamentary Trust

In making a will, the will-maker may create an express trust specifically for the benefit of an individual, such as a minor child or a person who is not capable of managing finances. The will-maker creates the trust by naming a trustee and specifying the assets set aside for the trust. This is called a testamentary trust. It is also sometimes called a “will trust”.

If there are questions about how the trust is being handled, that dispute may go to the court.

Assets held in trust are protected and managed by the trustee for the beneficiaries of the trust. An executor acts as a trustee[3] in holding and managing the estate assets on behalf of the beneficiaries of the will. A personal representative administering the estate with will annexed is the trustee[4] of a trust created under the will, unless the will names another trustee.

Inter Vivos Trusts

An inter-vivos trust is set up during the will-maker’s lifetime. The will-maker might not want to give up control of the assets, but might want the beneficiary to receive some income. So the will-maker transfers the assets to the trust, and may continue to act as a trustee. The trust pays income to the beneficiary.

This might be a helpful way to provide regular income to a beneficiary who is not able to handle a large amount of money.

When the will-maker dies, this trust is treated as an individual for tax purposes. In other words, the trust must file a return and pay taxes on its income.

Life Estate

A life estate is a gift to a beneficiary of the right to use real property for his or her lifetime. It is usually a gift provided to the surviving spouse, and lets that spouse remain in the spousal home after the will-maker’s death. When the spouse dies, ownership of the home might pass to the will-maker’s children. It is a gift in trust, not an outright gift. The life tenant does not own the property.

It may be an inter-vivos trust if an owner transfers title in the home to his or her children, but leaves him- or herself a life estate in the family home, to live there as a life tenant. In that case there would be no transfer of title upon the death of the life tenant.

Constructive Trust

Sometimes assets are subject to a constructive trust because one spouse was the legal owner but the family asset was actually for the benefit of both spouses. A constructive trust is created when one person owns an asset that has really grown in value due to the work of someone else, and that person thought the asset was shared or that they were both building the asset value for their shared benefit.

That situation can give rise to complicated legal claims, particularly if the spouses separated. If you think there may be a constructive trust affecting any estate assets, you should get legal advice.

Legal Claims of Constructive Trust

The leading Supreme Court of Canada case Pettkus v. Becker, [1980] 2 S.C.R. 834[5] dealt with a bee-keeping business and property that was legally owned by Pettkus while the spouse Becker had worked and contributed to it for nearly twenty years over the course of their spousal relationship. The Court found Pettkus had been unjustly enriched by Becker’s contributions and that she too was entitled to half ownership of the asset.

The owner of an asset may hold it in constructive trust if the asset value grew from the contributions of others. Unjust enrichment is a legal concept that depends on the existence of three things:

  1. the owner was enriched by the contributions of others,
  2. the others were deprived of or sacrificed the gains that the owner made, and
  3. there was no legal reason to justify the enrichment.

For more information, see “Unjust Enrichment and Constructive Trusts” in the chapter “Property and Debt in Family Matters”[6] of the Clicklaw wikibook JP Boyd on Family Law.

Resources

Online Resources

Coast Foundation[7] assists people who have mental disabilities to set up trusts (in Vancouver call the Trust Co-ordinator at 604-675-2321). Disability Alliance BC[8], produces a fact sheet about trusts for persons with disabilities. “Property and Debt in Family Matters”[9] from the Clicklaw wikibook JP Boyd on Family Law.

Legislation

Regulations and Forms

References

  1. www.clicklaw.bc.ca/resource/1120 [1]
  2. www.coastmentalhealth.com [2]
  3. WESA, s. 143 [full text: http://canlii.ca/t/8mhj]
  4. WESA, s. 156 [full text: http://canlii.ca/t/8mhj]
  5. www.canlii.org [3]
  6. wiki.clicklaw.bc.ca [4]
  7. www.coastmentalhealth.com[5]
  8. www.clicklaw.bc.ca/resource/1120 [6]
  9. wiki.clicklaw.bc.ca [7]
  10. Family Law Act [8]
  11. canlii.ca [9]
  12. canlii.ca [10]
  13. www.ag.gov.bc.ca [11]