One of the first steps in our estate planning process is meeting with clients to obtain instructions for their Wills and Powers of Attorney. Part of this meeting entails clients telling us what it is they want to achieve and us explaining how this can be accomplished (or why it cannot be accomplished as the case may be). This may involve various options of which the pros and cons need to be considered or it may require exploring alternatives to the initial instructions if it is not possible or practical to implement these as part of the estate plan.
The Need to Establish a Trust
One of the realities clients are often surprised by is that the instructions they have provided require the establishment of a trust. Clients may suggest, for example, that they want their estate to contribute money to a bank account opened for the benefit of a minor grandchild and to be managed by his or her parent until the grandchild reaches a certain age. This is a trust. Essentially, whenever you are not leaving an outright gift, but are placing a condition on the gift that requires those funds to be held by a person or people (the “trustee(s)”) for the benefit of a person or people (the “beneficiary” or “beneficiaries”), a trust is established. In the example above, the condition placed on this gift is that the beneficiary cannot receive the gift until they have attained a certain age.
Some Reasons for Establishing a Trust
There are various reasons clients may want funds to be held in trust. In addition to the above-noted example regarding the age of the beneficiary, a trust may also be appropriate where there is concern that the beneficiary cannot manage his or her own money, whether this be because of questionable past spending habits or a disability. Sometimes spouses will leave their estates to each other in trust for the lifetime of the survivor rather than outright to ensure that after the death of one spouse, the surviving spouse can benefit from the deceased spouse’s estate during his or her lifetime, but that any funds remaining on the death of the survivor are left to another beneficiary. These spousal trusts are common in situations where spouses are re-married and one or both of them has children from a prior marriage. Spousal trusts may also be used to address the concern that a surviving spouse will leave his or her estate to a new spouse after the death of one of them.
Is a Trust The Right Choice for My Estate Plan?
When determining whether a trust is right for your estate plan, it is important to consider the practical factors associated with establishing and maintaining a trust. Trusts require trustees and trustees are entitled to compensation for their work. In addition to trustee compensation fees, there will be investment management fees. Trustees must also file tax returns for the trust. This will likely entail accountant fees. Trustees must also account to beneficiaries, and preparing such accounts for the beneficiaries will likely entail legal fees. Oftentimes trustees will pass such accounts in court, in which case additional legal fees will apply.
Given the practical matters involved in establishing and maintaining a trust, it may be worth reconsidering whether a trust is appropriate if the contemplated gift is less than $50,000.
Other Factors to Consider
If a trust is appropriate for a client’s circumstances, a number of other factors will need to be considered. Choosing the right trustee(s), and alternate trustee(s), is an extremely important decision. The amount of discretion given to the Trustees will also need to be considered. The extent to which the trustees can make payments from the income and/or capital of the trust, and for which purposes, must also be considered. As income in a trust can only accumulate for 21 years, what is to happen with income accumulated in the trust following such date must also be contemplated. While one can only speculate so much when formulating his or her estate plan, it is important that any restrictions on the use or management of the trust funds (especially where there is potential for the trust to be maintained for a significant number of years), anticipate that changes in circumstances over the years may necessitate more flexible trust provisions.
The above outlines only a few of the various reasons a trust may be established and the factors to be considered when establishing a trust. If you have questions about whether a trust is appropriate for your estate plan, please call one of the highly experienced Toronto trusts lawyers at Mills & Mills at 416-863-0125 or contact us online.