Understanding Inter Vivos Trusts in Ontario: A Guide for Homeowners and Estate Planning.
What Is a Trust?
A trust is a legal arrangement in which a person, called the trustee, is required to hold property—whether real or personal, and whether under legal or equitable title—for the benefit of others, known as beneficiaries, or for another lawful purpose. In this arrangement, the true benefit of the property belongs to the beneficiaries or the intended purpose of the trust, not to the trustee. Trustees have a legal duty to act in the best interests of the beneficiaries and to follow the rules established in the trust agreement.
While a written document is not always required to create an express trust, relying on oral statements or agreements can create challenges. The main difficulty lies in proving the settlor’s intention—the original owner of the property—which often requires witnesses to confirm that the statements were made. For this reason, clearly documented express trusts, including inter vivos trusts and/or testamentary trusts, have become versatile estate planning tools that can provide practical advantages for Canadians of all income levels and estate sizes.
This article focuses on inter vivos trusts, highlighting their differences from testamentary trusts, their potential benefits, and how to place property in a trust in Canada.
What Is an Inter Vivos Trust (Living Trust)?
An inter vivos trust, often called a living trust in the U.S., is a legal structure that allows an individual to place assets—such as real estate or other property—under the management of a trustee for the benefit of one or more beneficiaries during the settlor’s lifetime. That is, inter vivos trust is created during a person’s lifetime, and can remain active after their death or terminate depending on the trust’s terms. By contrast, a testamentary trust is established through a will and only takes effect upon the will-maker’s death.
Inter vivos trusts are commonly used in estate planning to manage and distribute assets efficiently while offering certain protections and tax planning opportunities. Specialized inter vivos trusts, such as alter ego trusts or joint partner trusts, require properly drafted terms to function effectively. Legal guidance is essential to ensure the trust aligns with your goals and integrates seamlessly into your overall estate plan.
Why Consider an Inter Vivos Trust for your Real Estate Property?
Placing your house in an inter vivos trust offers several advantages:
Avoiding Probate: Property held in an inter vivos trust bypasses the probate process, saving time, reducing stress for your family, and minimizing probate-related costs.
Privacy: Unlike a will, which becomes a public document during probate, a living trust remains private. The trust’s details and assets do not enter the public record.
Flexible Distribution: You can specify how and when assets are distributed, such as passing a home to beneficiaries at a specific age or upon a future event.
Potential Tax Planning: Depending on the structure, trusts may offer opportunities for income splitting or deferring capital gains.
Protection Against Claims: An irrevocable trust can protect assets from lawsuits, creditor claims, or bankruptcy, provided it is not created solely to avoid legal obligations.
Considerations and Limitations
While inter vivos trusts offer many benefits, there are potential downsides:
Loss of Control: Transferring a house to an irrevocable trust means giving up ownership and control of the property.
Costs: Establishing a trust involves legal fees, property transfer fees, and/or potential ongoing trustee fees.
Impact on Financing: Mortgaged properties can be placed in a trust with lender consent but refinancing or using the property as collateral may be more complicated.
How to Place Real Estate Property in an Inter Vivos Trust
Some of steps to follow to ensure a trust is effective and legally valid are:
Evaluate Your Goals: Determine your objectives for the trust and how it aligns with your estate planning needs.
Consult an Estate Planning Lawyer: The Six Law Group can help you choose the right type of trust, and ensure compliance with legal requirements.
Appoint a Trustee: Select a trustee you trust to manage and distribute assets. Consider appointing alternates for contingencies.
Draft the Trust Agreement: Work with your lawyer to prepare a comprehensive trust document outlining the trust’s purpose, property, beneficiaries, and distribution terms.
Transfer Property and Register the Trust: Legally transfer title of your property into the trust and, if applicable, register the trust with relevant tax authorities.
Notify Beneficiaries: Ensure beneficiaries and relevant parties understand their rights and roles under the trust.
Costs and Common Mistakes when Creating a Trust
Trust costs vary depending on complexity, the use of a professional trustee, and property transfer expenses. Common mistakes include:
Failing to properly transfer property title.
Overlooking tax obligations.
Not consulting a lawyer.
These errors can undermine the trust’s effectiveness and create legal or financial complications.
Tax Implications in Canada
When a trust is established, the settlor either transfers property to one or more trustees or appoints themselves as trustee. Under the Income Tax Act, this is considered a disposition of property, making any capital gain taxable. Only 50% of the gain is included in taxable income, providing preferential tax treatment.
Tax treatment depends on whether the gain is retained in the trust or distributed to beneficiaries and whether the trust is revocable or irrevocable:
Revocable Trust: The settlor can amend or revoke the trust at any time. Therefore, the settlor is considered the owner of the assets for income tax purposes, reporting all income, gains, or losses on the settlor’s personal tax return at the settlor’s personal marginal tax rate.
Irrevocable Trust: Cannot be changed or revoked except in limited circumstances. The trust is a separate taxpayer, and income retained in the trust may be taxed at higher rates. Strategic planning can sometimes shift tax liability to beneficiaries in lower tax brackets.
Professional guidance from a lawyer and/or accountant is crucial to optimize tax outcomes, including deferring capital gains, income splitting, or implementing estate freeze strategies.
Inter Vivos Trust vs. Testamentary Trust
While both tools serve estate planning purposes, inter vivos trusts operate during your lifetime and can continue after death, whereas a will only takes effect upon death. Wills address additional issues such as funeral arrangements or guardianship for minor children. Many Canadians benefit from using both a will and a trust to achieve comprehensive estate planning.
Conclusion
An inter vivos trust can be a powerful tool to manage assets, protect privacy, avoid probate, and ensure your property is distributed according to your wishes. Whether you are considering placing real estate or other assets in a trust, consulting an experienced estate planning lawyer is essential to ensure your trust is legally valid and tailored to your needs.
THE SIX LAW GROUP
By: Samuel Amaya/SMP