Setting Up a Trust in Alberta

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Posted by heritagelaw on Oct 13, 2023 in Blog, Wills & Estate

In Alberta, trusts have long been an essential tool when planning your estate and are a powerful strategy to secure your family’s financial future and safeguard your assets and legacy.

At Heritage Law, we understand that estate planning can be a complicated process, but we are here to guide you through the fundamental aspects of trust planning and answer common questions about setting up a trust.

How Much Money Should Go Into a Trust?

One of the first questions you may have about setting up a trust is how much money should be placed in it. The answer to this question largely depends on your specific financial circumstances and goals.

Trusts are flexible, and you can fund them with a wide range of assets, such as:

  • Cash: Cash is one of the most straightforward assets you can place in a trust. It can include money in bank accounts, physical cash, or cash equivalents.
  • Real Estate: Real estate assets, including residential properties, commercial properties, and vacant land, can all be placed in a trust.
  • Investments: Investments, such as bonds, stocks, and mutual trusts, can be transferred to a trust.
  • Life Insurance Policies: Life insurance policies can be owned by a trust, and this is often done to provide a tax-efficient way to pass on the insurance proceeds to beneficiaries.
  • Personal Property: Tangible property, including artwork, jewelry, antiques, and collectibles, can be held in trust.

The choice of which assets you place in your trust should align with your overall estate planning goals and the nature of your assets.

The key is to work with a qualified trust planner who can help you determine the right amount to allocate to your trust.

How Does a Trust Work in Canada?

In Canada, trusts serve as a legal structure that separates legal ownership (held by a trustee) from beneficial ownership (held by the beneficiaries). 

Trusts are created through a legal document known as a trust deed or trust agreement. The trustee manages and administers the trust assets according to the terms and conditions of this document.

There are various types of trusts, including living trusts, testamentary trusts, and family trusts, each designed to serve specific purposes in estate planning. 

Are Trusts Taxable?

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Trusts can offer tax advantages in Alberta and are treated as separate taxpayers. However, their tax liability depends on the type of trust and the income it generates.

Taxation of Trusts

Trusts can be subject to taxation at the federal and provincial levels in Canada. The tax rate that applies to a trust depends on the type of income it earns, such as interest, dividends, capital gains, and other investment returns.

The income earned within the trust is typically taxed within the trust itself.

Types of Trusts

There are different types of trusts in Canada, each with its own tax implications:

  • Inter Vivos Trust: This is a trust that is created during a person’s lifetime. Any income not distributed to beneficiaries is taxed within the trust.
  • Testamentary Trust: This type of trust is created upon the death of the settlor and can have various tax implications. It may be taxed at graduated rates or flat rates, depending on the terms of the trust and the timing of distributions to beneficiaries.

Tax Planning Strategies

Despite potential taxation, trusts offer valuable tax planning opportunities, and properly structured trusts can help minimize tax obligations. Some strategies include:

  • Income Splitting: Distributing income to beneficiaries in lower tax brackets can reduce the overall tax liability of the trust and its beneficiaries.
  • Capital Gains Exemptions: Taking advantage of the lifetime capital gains exemption for certain types of assets, like qualified small business corporation shares, can help reduce the tax burden on the trust.
  • Charitable Giving: Charitable trusts and donations can offer significant tax benefits, as contributions to registered charities can be tax-deductible.
  • Prescribed Rate Loans: Loans from a trust to beneficiaries at the prescribed rate can help shift income to beneficiaries in lower tax brackets, potentially saving taxes.

What Are the Disadvantages of Trusts?

While trusts offer numerous benefits, including asset protection and efficient distribution of assets, they also come with certain disadvantages.

These may include administrative complexities, ongoing management, and legal costs, and, in some cases, potential taxation.

It’s crucial to weigh the pros and cons of establishing a trust based on your unique circumstances and goals.

What Are the First Steps to Setting Up a Trust?

Setting up a trust in Alberta is a meticulous process that requires careful consideration of your goals and the legal and financial aspects involved.

Here’s a look at each step:

Identify Your Objectives

Clearly define why you are creating the trust. Is it for estate planning, asset protection, charitable giving, or some other purpose?

You should also set clear objectives for the trust. Do you want to provide for your family’s financial security, minimize tax liability, or preserve certain assets for future generations?

Choose the Right Type of Trust

The next step is to choose the right type of trust by analyzing your needs and objectives. For example, you could choose a revocable living trust for flexibility during your lifetime or an irrevocable trust for asset protection.

Select a Trustee

Designate a trustee who is responsible, trustworthy, and capable of managing the trust according to your wishes and instructions. You can also opt for a professional trustee, such as a bank or trust company, for their expertise and impartiality.

Draft a Trust Deed

Your trust deed should clearly specify the beneficiaries, distribution rules, and trustee’s powers and responsibilities. Consult with an expert trust and estate attorney to draft a comprehensive deed that complies with Alberta’s legal requirements.

Fund the Trust

To make the trust effective, you need to transfer assets to it. Ensure that all asset transfers are documented correctly and in compliance with the trust deed. Keep records of these transactions.

Unlock the Power of Trust Planning With Heritage Law

Setting up a trust in Alberta is a strategic move to secure your family’s financial future and protect your legacy.

The process, while intricate, can be simplified by following essential steps.

However, to ensure the utmost precision and compliance with legal and tax regulations, it’s crucial to seek professional advice.

Contact Heritage Law today to unlock the potential of trust planning.