Trusts offer a wide range of advantages in the wealth planning process

For many families, trusts can be a useful vehicle for passing on wealth to the next generation or generations. This is not their only advantage. Trusts can also be used to help reduce taxes, avoid probate, donate to charity, and even manage assets if the trust owner becomes disabled.

Although sometimes considered the domain of the ultra-rich, trusts can benefit families at all levels of wealth. The key to unlocking their full suite of benefits is understanding how trusts work and choosing the right people to run the trust when the time comes.

Parties associated with a trust

A trust is a legal entity that holds assets for the benefit of one or more people or entities. There are generally three parties associated with a trust:

  • Grantor/Settlor/Trustee: This is the person(s) who create and fund the trust.
  • Beneficiary: The beneficiary is the person, persons or organization designated by the settlor to benefit from the use of the assets of the trust, subject to the terms of the trust. Beneficiaries of a trust can include one or more people or organizations.
  • Trustee: The trustee manages and administers the trust. A fiduciary can be an individual or an organization.

Main types of trusts

Trusts can be created by execution of a trust agreement during his lifetime (inter vivos trusts) or upon his death through a last will (testamentary trusts). Although there are many types of trusts, they generally fall into one of two categories:

Revocable trusts

With a revocable trust, a settlor retains control over the terms of the trust. The settlor may change these terms at any time, including changing the beneficiary, adding new terms and selecting a new trustee. The settlor can even dissolve the trust.

A revocable trust allows the settlor to retain control of the assets during their lifetime and can be used to facilitate the process of administering the estate after the settlor’s death. It is important to understand that revocable trusts are not tax saving vehicles. Their main objectives are asset management, incapacity planning and simplifying the administration of estates.

Irrevocable trusts

Unlike revocable trusts, the settlor relinquishes control of the assets placed in an irrevocable trust once the trust is established. Funding an irrevocable trust is a full gift of those assets, and the settlor cannot make changes to the trust after signing the document.

Irrevocable trusts are most often used as wealth transfer tools and are useful for providing funds to individual family members. Since the settlor makes a full gift of the assets upon establishment of the trust, the assets are no longer included in the settlor’s estate during their lifetime. In addition, any appreciation of funds within the trust will be passed on to the beneficiaries of the trust without estate tax.

Fund a trust

Once the trust is established, the settlor funds it by transferring assets to the trust. Assets that may be placed in trust include:

  • Investment accounts
  • Immovable
  • Certificates of deposit
  • Cash accounts
  • Life insurance
  • Personal property (e.g. works of art, jewellery, valuable furniture, etc.
  • Business ownership

On the other hand, certain assets should not be placed in a trust. For example, retirement accounts such as a 401(k), individual retirement account, or annuity cannot be transferred into a trust without liquidating the account and creating a taxable event. It is possible to designate the trust as the beneficiary of the retirement account. Upon your death, the trust becomes the beneficiary of the account and the trustee determines how to manage and disburse funds from this account.

Setting up a trust

If you and your team of advisors have decided that a trust is right for you, the first step is to sit down and make decisions about the trust. Some of the questions to ask are:

  • What do I want to accomplish with this confidence? (for example, reducing taxes, transferring wealth, supporting myself in the event of incapacity, etc.)
  • What assets will be transferred into trust ownership?
  • Who will be the beneficiaries?
  • Who will be the trustee?

An estate planning attorney should draft the trust document to ensure that the trust is properly structured and meets all state-specific requirements. If you choose a revocable trust, now may be a good time to consider updating your will to state that all assets in your name are to be distributed to the trust upon your death. You can also create or modify your financial power of attorney to coordinate it with your revocable trust.

Trusts are complex planning strategies that can provide flexible, powerful, and customizable ways to help protect your assets and your family and make transferring your assets more efficient. Please consult your legal and other advisors to determine if a trust would be appropriate for your particular circumstances. Visit our Trustee Services page to learn more.

The legal concepts and tax information contained herein are general and for informational purposes only. CIBC Private Wealth Management does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisors.

Louisa R. Loomis