Understanding Trusts

Over the summer, Knowledge Bureau will be taking an in depth look at the use of trusts in family wealth planning. An introduction to the topic begins the series.

Avoiding Tax with Trusts

Despite recent changes announced in the taxation of testamentary trusts, the use of trusts in tax and estate planning continues to be a significant tool in preserving family wealth. They can be used to avoid, defer, or minimize taxes and hold property for the benefit of future generations.

Trusts have had a long and storied past:

The trust arose during the feudal era so that landowners could bypass some of the stringent rules under common law. At that time, the doctrines of “seisin” and “primogeniture”  governed the distribution of real property upon a landowner’s death; that is, the first-born son would receive the interest in land, and if there were no heirs, the land would escheat (revert) to the Crown.

An equitable tool called “uses” was established to avail wealthy landowners from the stringent common law rules mentioned above. A chancellor, as opposed to a judge of the law courts, presided over the Court of Chancery at this time and the rules therein were generally more favourable to applicants, so long as they came to the court with “clean hands”. The Judicature Acts of the 1870s fused the two courts and ever since, common law courts have had jurisdiction to decide cases on both legal and equitable grounds, with equity prevailing in the case of conflict. “Uses” evolved into the modern trust.

This was the beginning of the use of trusts to defeat feudal, death and tax dues. Trusts remain one of the best devices to preserve wealth within the family. Trusts are mostly commonly implemented for the following reasons these days:

1. To enable property, particularly land, to be held for persons who cannot themselves hold it (such as minors or adults with capacity issues).
    
2. To enable a person to make provision for dependants privately. (This will be covered in the secret trusts/half secret trusts article in the coming weeks.)
    
3. To tie up property so that it can benefit persons in succession.
    
4. To protect family property from wastrels and spendthrifts.
    
5. To make a gift to take effect in the future in the light of circumstances which have not yet arisen and so cannot yet be known (such as leaving a cash legacy to grandchildren who pursue post-secondary education).
    
6. To minimize the incidence of income, capital gains, and inheritance tax.
    
7. To enable two or more persons to own land.
    
8. To facilitate investment through unit trusts and investment trusts.
    
9. To enable companies to raise finance from investors on the security of debentures and bonds.
    
10. To make provision, particularly by will, for causes for non-human objects (e.g., donations to charitable organizations, or for pets).
     
11. To protect the environment.
     
12. To provide pensions for retired persons and their dependants.

IN THE COMING WEEKS:

How to make better wills, including the following:

• Testamentary Autonomy - Wills Variation Act legislation
• Testamentary Capacity
• Undue Influence (what is it, how to prevent it or potential accusations of it, “suspicious circumstances”)
• Types of Trusts
  • Inter vivos and testamentary
  • Properly constituting the trust: the three certainties/preventing administrative unworkability
  • The doctrine of Cy-près
  • The Saunders v. Vautier principle
  • Secret Trusts/half secret trusts
• Inter vivos gifts/joint ownership of assets
• Rule of survivorship/ presumption of resulting trust for independent adults