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What Are Trusts And What Are They Good For?

Before answering these questions, I should explain that trusts can either be set up while you are alive, called intervivos or upon your death, called testamentary. In answering the first question, a trust is a legal relationship between three people, the person who owns an asset (called the settlor), the person who holds ownership of the asset (called the trustee) and the person who benefits from the asset (called the beneficiary). Basically, the settlor transfers legal ownership of an asset (called the property) to the trustee who holds it for the benefit of the beneficiary. The trustee is responsible for the management of the property. The trust will set out the details or terms. There are three legal requirements for a valid trust as follows: 1. An intention to create a trust; 2. The property must be identifiable and it must be transferred; and 3. The beneficiary must be identifiable. Trusts can be verbal but it is best to have them in writing so there is no dispute as to the terms. Now to answer the second question, what good are they. They have many uses, often with preferential treatment under tax law. They are often used to provide income for children, grandchildren, even for care of a pet. Just a quick word on taxation of trusts. Generally, because the trust is treated as a separate person (entity) under tax law, the trust can pay any applicable taxes. If done properly, beneficiaries will be taxed only on the income paid to them and not on the income earned in the trust. Intervivos trust are taxed differently than testamentary trusts so it is important to consult with an accountant. Finally, it goes without saying that it would be wise to consult with a lawyer on the wording of the trust and its administration.