How a family trust helps protect your wealth and control your legacy in Canada

Modern family dynamics can complicate how to manage and pass on wealth: a blended family portrait may include a spouse or an ex, stepchildren, kids from different relationships, dependants with special needs or family members who struggle with money.

And if heirs have their own ideas of what’s “fair,” how can you be sure your wishes will be carried out after you’re gone?

A family trust can be a handy tool that gives you more flexibility over how the wealth you’ve built might benefit the next generation and help maintain family values. It lets you set the terms of how and when assets are given to the people you love—whether in your lifetime or through a legacy.

What is a family trust?

Like families, family trusts in Canada don’t follow a one-size-fits-all model, explains Thomas Grozinger, C.S., LL.B., TEP principal trust specialist (common law) with RBC Wealth Management, Royal Trust.

“‘Family trust’ is a term of art, more than a technical term, per se. I think people understand that term to mean, simply, that it’s a trust that has beneficiaries who are related to the settlor [the person who creates the trust]. In addition, there are so many different permutations of families,” says Grozinger.

A trust is a legal arrangement in which a person (the “settlor”) places assets with a trustee to manage them for the benefit of beneficiaries. It is not a corporation, but for tax purposes acts as a separate taxpayer, and usually must file a tax return.

There are some significant differences between trusts in common-law provinces, where the trustee holds legal title to assets for the benefit of beneficiaries, and those under Quebec’s Civil Code, which are a separate patrimony with no owner, held and administered by trustees, including at least one independent trustee.

Depending on the objectives, a family trust can take effect while you’re alive (an inter vivos trust) or begin after your death, through a Will (a testamentary trust).

Despite the differences, family trusts in Canada share a common aim: to steward wealth across generations.

When does it make sense to set up a family trust?

People establish family trusts for many different needs or specific situations, such as:

• An estate freeze on a corporation to transfer future capital growth to family
• Helping children with major expenses like education or a first home
• Setting aside funds for grandchildren, existing or future
• Providing for a dependant with a disability or who has ongoing care needs
• Safeguarding assets if a beneficiary is dealing with addiction or mental health issues
• Providing a framework for the use of a family cottage (or other shared assets) among different family members
• Adding a layer of protection where beneficiaries may experience financial hardships, including the financial impact of a marriage ending
• Providing financial support while limiting direct control over assets

Trusts may also be useful in tax planning, but they aren’t a tax shelter. Most trusts must report unrealized gains on their assets after 21 years. This prevents them from deferring capital gains indefinitely.

How to protect your children’s inheritance

While pop culture often paints “trust-fund kids” as jet-setting influencers, family trusts can achieve the opposite—they impose discipline by distributing funds over time, unlike a lump-sum inheritance through a Will.

“It may make more sense to give money in a trust than to, say, give your 20-year-old child $500,000 that could be spent within a year on high-priced cars and luxury vacations,” says Grozinger. “In that situation, a trust can provide a beneficiary the opportunity to mature in their ability to handle money, and protect funds from being diminished or lost during that period when they are ‘adulting.'”

An independent trustee may be able to ease tensions in complex family situations, suggests Elisabeth Evans-Olders, LL.B, TEP, principal trust specialist (civil law) at RBC Wealth Management, Royal Trust.

“One example is a parent worried about protecting their child. They might be concerned about the financial influence of a child’s spouse, or a person’s inability to handle financial matters,” says Evans-Olders.

“Instead of giving money directly, they’ll take a step back through a [inter vivos] family trust. The independent corporate trustee, acting as intermediary between the parent and their child, can become a financial educator.”

She says that beneficiaries have regular contact with the corporate trustee to chat about their financial needs, fostering a strong working relationship.

“Trust accounts are among those where we have the most continuous personal contact with beneficiaries, sometimes over a lifetime and even sometimes into the next generation,” she says.

Whom should you pick to be trustee?

Your choice of trustee is an important consideration.

“The responsibility is heaped on the trustee to make sure that everything is appropriately administered—this applies whether in Quebec or under common law—and trustees must fulfill numerous fiduciary duties,” says Grozinger.

A trust can be non-discretionary, with fixed instructions for trustees to follow (for example, pay a specified beneficiary $1,000 per month), or discretionary, giving them the power to decide how and when to distribute income and capital to financially support the beneficiary.

“Discretionary trusts provide the greatest flexibility, because the trustee can determine at any given time whether or not beneficiaries are in need, and allows trustees to determine how much and when encroachments on the trust’s income or capital should be made to benefit the beneficiaries,” says Grozinger.

A trustee should be trustworthy and organized, know your family dynamics and be unbiased, to prevent or resolve disputes. Even if you name a spouse or a child, the support of a corporate trustee can lessen the administrative burden of reporting and tax filing.

“Families today come in many different forms, and blended families from second or subsequent marriages with children from prior relationships are not uncommon,” says Grozinger. “Discretionary trusts enable the trustee to decide how best to distribute funds in such family contexts. Where minors are involved, trusts can also help to protect assets for eventual distribution once the minor reaches a specified age.”

A family trust can therefore be part of an estate-planning strategy to lessen the risks of disputes over inheritances and assets and support the next generation’s success.

Frequently asked questions

Q: What is a “family trust” in Canada?

A: The term “family trust” is often used to describe a trust for the family members of the settlor. It is a legal arrangement in which a trustee holds and manages assets for the benefit of family members.

Q: How does a discretionary trust work?

A: In a discretionary trust, the trustee has the authority to decide how and when trust assets and income are distributed among the beneficiaries. This flexibility allows the trustee to manage the trust assets for the benefit of the beneficiaries in the face of changing circumstances.

Q: What is the difference between an inter vivos trust (sometimes called a “living trust,” except in Quebec) and a testamentary trust created in a Will?

A: An inter vivos (or “living”) trust takes effect during your lifetime. The trust assets are separate from your own assets. A testamentary trust created in a Will takes effect only after your death.

Q: What is the “21-year deemed disposition” rule?

A: Under Canadian tax law, most trusts are deemed to have sold and reacquired their capital property every 21 years. This triggers capital gains taxes on any appreciation, requiring careful planning to fund the tax liability.

Q: What is an “estate freeze” and how does it involve a trust?

A: An estate freeze locks in the current value of a business owner’s shares by exchanging the value of these shares for preference shares that are at a fixed value, and providing for new shares that can increase in value as the business grows. This allows for the transfer of future growth to the next generation. A family trust is often used to hold the new shares, providing flexibility in how the wealth is eventually distributed and potential to reduce the overall tax burden.

---

---