What Are Reasons to Not Have a Trust in Canada?

What Are the Main Reasons to Not Have a Trust?

The main reason to avoid a trust is if your estate is simple.

You don’t benefit from the added costs and complexities if your estate is simple. In addition, if you don’t want to lose control of the assets, then a trust may not be a fit for you.

Finally, if you don’t have the time or ability to invest in properly establishing a trust and working with professionals, the likelihood of errors makes establishing a trust not worth it. 

Written By Tiffany Woodfield, Financial Advisor, TEP®, CRPC®, CIM®

What Are the Pros and Cons of a Trust?

Pros of Trusts

One of the benefits of a trust is that you can use strategies that aren’t available without a trust, such as ensuring specific individuals are protected. You can minimize the threat of dependent relief claims because a trust is more challenging to dispute than a will.

In addition, assets in the trust remain private and do not go through probate. Beneficiaries can receive them more quickly and efficiently. You also have more creative strategies and control over how your wealth is distributed.  For example, there can be certain conditions met before money can be dispersed. 

Cons of Trusts

Establishing and maintaining a trust requires time and money. It also increases the complexity of your estate planning.

In addition, you relinquish control when you place assets in a trust, as direct ownership is transferred to the trust. A trust is not foolproof, and you need to make sure it is drafted properly, or it will create more problems.

Pros and Cons of a Trust in Canada

Pros of a Trust	Cons of a Trust
Allows advanced planning strategies not available with a will	Requires more time and money to set up and maintain
Can better protect specific individuals and beneficiaries	Increases the complexity of your estate plan
More difficult to challenge than a will	Must be carefully drafted to avoid legal issues
Keeps assets private and avoids probate	Ongoing administration may be required
Enables faster, more efficient distribution to beneficiaries	Less flexibility once assets are transferred
Allows control over how and when assets are distributed	You give up direct ownership of assets placed in the trust

When Does It Make Sense to Have a Trust?

It makes sense to establish a trust when you have a complex estate and want to ensure a smooth transfer of significant assets.  

In certain situations, such as a family business, a blended family, or disabled beneficiaries, a trust offers flexibility and strategies to protect your interests.  It also adds privacy for your estate and can protect it from lawsuits and creditors. 

What Is the Main Purpose of a Trust for Estate Planning?

The primary purpose of a trust in estate planning is to provide greater control over how your wealth is distributed upon your death.  

A trust allows you to avoid probate, creates flexibility for distributing assets, and gives peace of mind that your wishes will be followed.  Although the tax advantages have been reduced, a trust can still offer tax benefits.

What Are the Most Common Types of Trusts in Canada?

The most common types of trusts in Canada are inter vivos (living) trusts and testamentary trusts. 

A living trust is created during your lifetime, while a testamentary trust is established in your will and comes into effect after your death.   

Some specific trusts include: 

• Alter ego trusts and joint partner trusts, which are for seniors who are 65+
• Henson trust, for individuals with disabilities
• Family trust, used to income split
• Estate freeze, often used for businesses
• Charitable trust funds philanthropic causes and provide tax relief

What Is the Best Way to Leave Your House to Your Children?

Many people think the best way to leave their house to their children is to add them to the title while they are alive. 

This may seem like an easy solution, but it can actually cause problems.

When you add a child to your home’s title, the government may treat it as if you sold part of your home. This could trigger capital gains tax and cause you to lose part of your Principal Residence Exemption. 

It also means your child legally owns part of the home, so their debts, lawsuits, or relationship breakdowns could put your home at risk. For example, if your adult child gets a divorce, your home could end up being mixed up in the divorce proceedings. 

A more common option is to leave your home to your children in your will. 

This allows you to keep control of your home until your death and avoids triggering tax during your lifetime. However, the house will need to go through probate before it can be passed to your children. 

You may also consider establishing a trust with your children as beneficiaries. Depending on your circumstances, the additional complexity and creditor protection may not be warranted. In addition, there are other considerations if you’re leaving a second home to your beneficiaries. 

I recommend consulting with an estate lawyer and your financial advisor to fully understand your options.  

What Is Better Than a Trust?

There isn’t necessarily something “better” than a trust, as you aren’t comparing apples to apples.

Your goals determine the right estate planning tool. A trust is an effective tool. However, in estate planning, it is important to consider using other instruments. Wills, joint ownership, and the designation of direct beneficiaries on registered accounts are all important estate planning tools. 

Trusts in Canada vs. the United States

In the United States, revocable trusts are used much more frequently than in Canada for estate planning.  

This is because in the US, a trust is considered a “disregarded entity,” which means that when you put items into a trust or take them out, it generally isn’t a triggering tax event, unlike in Canada.  

Additionally, for tax purposes, a trust is treated as the same as you, so, unlike in Canada, you don’t file a separate tax return. Many people in the US benefit from using revocable trusts, as it helps them avoid probate.  

The problem I have seen is that some Americans and dual citizens don’t receive advice about their trust before moving to Canada, with their assets and investments still held in a revocable trust in the US. 

The tax rules between the two countries differ significantly, which can lead to double taxation.

Before considering a trust, you should conduct research and consult experts who can advise you on your particular situation. While a trust can be an excellent tool, a poorly set up trust can increase complexity and have unintended consequences. 

In addition, make sure that you’re creating a trust for the right reasons. Ask yourself, “What matters most to me?” Then use that as a guide when creating your estate plan. Your estate plan should always align with your values and what matters most. 

How Your Emotions Affect Estate Planning

Even though estate planning involves legal documents, tax rules, and careful strategy, emotions always play a role. 

Money is emotional. 

Fears about running out of money, losing control, or making the wrong choice can lead people to delay planning or create overly complex structures in an attempt to control every possible outcome. In doing so, they often overlook simpler, more effective solutions.

I often use the image of rowing toward a lighthouse. The lighthouse represents money, safety, optimization, and doing everything “right.” Many people row and row toward that lighthouse without noticing the beautiful island just off to the side, where their family, community, and life are actually happening. 

Estate planning should help you reach the island, not keep you endlessly rowing past it.

When you start with clarity about what matters most, professionals can then run the numbers, explain the tax implications, and help you choose the right tools, whether that includes a trust or not. 

Estate planning works best when money is treated as a tool, not the goal itself.

When you approach your estate planning, try to bring an open mind to the process. Connect with what truly matters to you, and let that guide your decisions. From there, the strategy can support your life and values.

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Read More:

💎 What Is a Living Trust in BC?

💎 What Is the Purpose of a Trust in Estate Planning? 

💎 Why Should You Use Trusts for Estate Planning Canada?

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