A trust can be used for a wide variety of personal and commercial purposes. If you are considering a trust as part of your estate plan or business structure, it will be important to understand what a trust is, the duties and powers of trustees, and the rights of beneficiaries.
What is a trust?
A trust is not a legal entity, although it is treated as such for Canadian tax purposes. A trust is simply the word used to describe the relationship created when property is transferred by one person (the "settlor") to another (the "trustee") to hold for the benefit of specified persons or a class of persons (the "beneficiaries").
Subject to tax and other considerations, it may be possible for the settlor and the trustee to be the same person. In some cases, a settlor or trustee might also be a beneficiary of the trust.
How is a trust created?
A trust can be created by an individual during his or her life (an "inter vivos trust") or as a consequence of his or her death (a "testamentary trust").
The terms of an inter vivos trust are usually set out in a document signed by the settlor. It will appoint a trustee or trustees and direct how assets are to be held, managed and distributed to or for the benefit of the beneficiaries. An inter vivos trust is created once the beneficiaries and the terms of the trust have been settled by the settlor and the trustee with sufficient certainty, and property has been transferred to the trustee to hold in accordance with the terms of the trust.
A testamentary trust, on the other hand, is created as a consequence of an individual's death, usually pursuant to the Will of the individual or a beneficiary designation made in respect of an insurance policy, a registered retirement savings plan or a registered retirement income fund. A testamentary trust only comes into existence on the death of the individual who made the Will or beneficiary designation.
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