What Is a Trust? and Why Would I Use One?
A trust is a legal agreement between the trustees who hold the legal title to the property for the benefit of the beneficiaries. The settlor contributes some nominal value to establish the trust but has no further involvement. There are, two types of trusts:
- Inter-Vivos Trust or Living Trust – is set up during somebody’s lifetime
- Testamentary Trust set up on someone’s death
There are two benefits of trusts:
- Asset Protection
For asset protection the trustee can manage the assets for the beneficiaries and distribute assets as they see fit. The beneficiary would often receive control over the trust at a certain age. Parents often leave assets to a child in trust rather than directly to provide some protection in case of a marriage breakdown. Spousal trusts keep the assets in trust for the benefit of the surviving spouse during their lifetime, with the ultimate distribution of assets directed by the deceased’s will often be to the children of the deceased or charity.
- Tax Planning
Some tax planning areas where trusts can be used are estate freezes with the future growth of a company is held in a trust, this allows a tax on this growth to be deferred till the death of the trust beneficiaries, often the children, or till the beneficiaries themselves sell the assets. Should be noted that there is a deemed disposition rule every 21 years for the trust. Therefore, assets are usually distributed out of a trust prior to the 21 year anniversary date to avoid this deemed disposition. Income splitting, income can be paid to trust beneficiaries and be taxed in their hands. However, the new split income rules and attribution rules should be considered for tax planning.
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