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Unit-11
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The Basics
A tripartite agreement between the settlor, the trustee and thebenefciary.
Settlor is the person whose property is transerred to the trust.The transer process can happen while he is alie or triggeredupon his death.
Trustee is administrator o the trust property and e!ecutes theinstructions o a trust deed.
Benefciary" The end benefciary o this deed. The benefciaryreceies his benefts according to what the deed states. Thin#age, percentage per year, $i!ed s. %iscretionary etc.
&ne o the primary reasons or trusts is that the settlor do nottrust the benefciary's ability to manage the be(uestresponsibly
)ore oer, trusts are e!tremely *e!ible and accommodatie
+ey terms - nterios trust, testamentary trust and ntestacy
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Benefciary
Benefciary can either be entitled to the incomea trust generates or the capital o a trust. Atrigger eent is necessary
A trust cannot retain income or its own good.ncome retained becomes part o capital at theend o fscal
ie interest - a condition in the trust deedallowing the use o property or a certain timelietime o the occupant/
0emainder interest Ater the lie interestceases, the property can be li(uidated or cash.
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2ested s.
3ontingent 4roperty is said to be ested i all the re(uirements
set out in the deed are met. no re(uirements areset, the deed is said to be ested absolutely.
Absolute esting means the benefciary can sell theproperty ested without haing to ta#e possession.
2esting can be sub5ect to riders li#e sub5ect todiestment
2esting can be contingent on occurrence o acertain eent.
The di6erentiation is important when winding upthe trust.
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Setting up a trust 3ertainty o intent
clear intention to transer property to thebenefciary and with it, all its economic benefts.
The trustee has to hae a legal obligation tomaintain the property and not a moral one.
3ertainty o Sub5ect )atter
4roperty must be clearly identifed
3lear understanding on the #ind o benefts *owing ncome or 3apital
3ertainty o &b5ects
4hysical identifcation o benefciaries is important.
7aming each benefciary rather than describing aclass or group o people
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3ontd..
The settlor should be an able man with a sound mind
Trustee can be anyone including a corporation
Benefciaries can include any legal entity
Transerring the trust property to the trusteeessential to #ic# start the arrangement.
A trust cannot go on oreer. aw re(uires a fnite
lie o the trust or commercial and economicreasons. 3urrently, lietime o a lie plus 81 years.
4roinces hae their own ariations o the perpetuitylaw Some oerride the 3ommon aw, some haeproisions which act as wait and watch.
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Trust classifcation
nterios trust 9stablished while the settlor is alie
0educe ta! liability or benefciaries ta! liability
0ing ence assets rom creditors
Testamentary trusts established upon death or inaccordance with proincial legislation.
Testament trusts are liable or income ta!es. $edralgoernment sees these trust as any other person
earning an income. :ill become a inter ios trust i it receies additional
assets rom another liing party
3onstructie Trusts 3an be used to remedy disputesoer property during brea# up o relationship.
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3ontd..
4ersonal s. 3ommercial trusts
0eocable and rreocable trust
%iscretionary Trusts
Bare Trusts
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Trust Ta!ation
Testamentary/ Testamentary Trusts ta!ed either in the hands o the
trust or in the hands o the benefciary
aw see#s a trust to be at par with an indiidual in
terms o slabs and the marginal ta! rate/
To sae ta!es, income splitting can be achieed bycreating two or more separate trusts or two or morebenefciaries.
Two trusts cannot howeer be created or onebenefciary.
:hen a ta!payer dies and leaes the property toanyone other than spouse or common law partner, thetransaction is treated or ta! purposes as i the
property had been sold or proceeds e(ual to airmar#et alue
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nter ios trusts
ta!ation Ta!ed at either the hands o trusts or in the hands o the
benefciary
To the e!tend that such income is paid or payable to a
benefciary it may be deducted in calculating the ta!ableincome o the trust.
Any income attributed is ta!ed at the rate o ;igh ta!ation has seerely restricted the ta! beneft otrust creation.
Transers to non rolloer inter iios trusts are deemed tobe dispositions at air mar#et alue.
mportant to distinguish between a rolloer and a nonrolloer trust.
)ust fle an income ta! return or the trust called T?, nolater than @ days ater the end o the ta!ation year.
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3ontd.
the trustee disposes a capital asset andrealies a capital gain, and orwards theproceeds o the disposition to the benefciary,
the benefciary can record that income ascpital gain and only
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Alter 9go Trusts C Doint
Spousal Trusts A trust or onesel the only indiidual who has any
access to the trust capital during the settlors lietime
The settlor must be age E< or aboe
A named benefciary other than the settlor ater thedead o the settlor
4rotectie Trusts +ind o Alter 9go trust withe!tra layer o protection or the settlor
Doint spousal trusts are similar to Alter 9go trusts,with the only di6erence being that only the settlorand his or her spouse or common-law partner can
receie the income or capital o the trust duringtheir lietimes.
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ie nsurance
Trusts A trust specifcally set up to receie lie insurance
policy proceeds on the death o the person insured.
3an be done inter ios or testamentary
ncome splitting is a popular reason or settingthee trusts up
3onfdentiality Trusts by pass the 4robate phase.AU) is not made public
A change in benefciary attracts deemed dispositionaction or income ta! purposes.
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nsurance trusts or )inors
A split dollar arrangement could be structuredusing an e!empt uniersal lie policy on theparents lie, shared between the parent and a trust
established by the grandparent o the grandchild.
4remiums would be shared between the parentsand the trusts
The grandparents would contribute cash to the
trust or the purpose o paying the premiums.
$or a child oer 1F, the income allocated to thechild will be ta!ed at his or her marginal rate. $ora child under 1F, the income receied will be ta!edto the trust at the trusts marginal rate or to the
grandparent at his or her marginal rate.
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&bligations o a
trustee Trustee act o the proince establishes
statutory powers, duties and obligations orall trustees.
egislation gies the trustee certain powersli#e the power to inest the trusts unds incertain categories o inestments.
Trustees hae to apply or permission tocourts or actions outside those defned inthe deed. mplication %eed should becrated ater deliberation and discussion.
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egal ist System
Trustees are not allowed to ma!imie returnon inestment
Straight 5ac#et the trustee to ensure thereal alue o the trust assets can bemaintained oer time.
0estricts the trustee rom achiing true
portolio diersifcation.
A settlor can ree the trustee rom theserestrictions by esting powers to act reely
Some proinces, on the other hand, do giebroad powers to trustees
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Trustee %uties and 4owers
Trustees do hae a statutory power to sell realproperty under proincial legislation
Trustees can borrow money on behal o the trusti the trust deed proides or. Generally to meetcurrent liabilities.
$or trusts which hold part cash and part asset,the trustee should hae powers granted to assign
alues to the belonging distributed.
$ulfll debt obligations
:hen managing trust property, the trustee mustact with an een hand. This means that he should
consider the best interests o the benefciaries.
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9nding a Trust
There is no trust once the property hasbeen distributed to the benefciary and aproper distribution has ta#en place.
9nd o trust can get triggered post an eenoccuring
the trust is reocable
Upon agreement o benefciaries to dissolethe trust and distribute the possession
the trust ails to accomplish the tas#
