Most BC families who need a trust need one written into their will, not a family trust set up today

Do you need a trust, or is a will enough?

A will on its own is enough when every beneficiary is an adult who can manage money and nothing calls for control after your death. You need a trust when someone will inherit before they are ready, receives disability assistance or needs protection, or when a tax or succession goal can't be met by a will alone.

Start from the problem, not the product. Avoiding probate is rarely enough on its own: the fee saved has to be weighed against a lifetime trust's setup cost and yearly accounting, and joint or designated assets already pass outside the estate. Control is usually the stronger reason.

Much online advice is American, where a revocable living trust is a routine way around a slow, costly probate. That doesn't carry across. Canadian lifetime trusts have their own Income Tax Act rules, and the nearest BC equivalents, alter ego and joint partner trusts, suit narrower situations.

What kinds of trusts are used in BC estate planning?

Four kinds come up most often in BC estate planning: a trust in a will for children or grandchildren, a fully discretionary trust for a beneficiary with a disability, an alter ego or joint partner trust set up during life by an older person, and a family trust used alongside an estate freeze of a family company.

The first two are usually clauses in a will; the last two are set up during life, with their own documents and tax filings.

How does a trust in your will protect a child's inheritance?

A trust in your will holds a child's share with a trustee you choose until an age you set, which can be later than the age of majority. Without one, a minor's inheritance is generally paid to the Public Guardian and Trustee and released in full when the child comes of age. The trust can also allow spending before then.

The trustee can usually spend income and capital on the child's education, health and support, then pay out at a set age or in stages. You can name a trustee other than the executor and say where the share goes if the child dies first. WESA and the Trustee Act govern investing and accounts.

What is a Henson trust for a beneficiary with a disability?

A Henson trust is a fully discretionary trust: the beneficiary has no right to demand any payment, and the trustee decides whether and when to pay. Because the beneficiary can't compel payment, BC disability assistance rules generally don't count the trust as their asset, which can protect eligibility. The rules change, so they are checked when the will is drafted.

The rules are in the Employment and Assistance for Persons with Disabilities Act and its Regulation. A Henson trust often sits beside a Registered Disability Savings Plan, which has its own rules, and a trust created by will for a beneficiary eligible for the disability tax credit can elect to be a qualified disability trust, taxed at graduated rates. The choice of trustee matters most here, since the beneficiary relies on that judgment for life.

What are alter ego and joint partner trusts?

Alter ego and joint partner trusts are lifetime trusts under special Income Tax Act rules for older Canadians who meet its age requirement. Only you, or you and your spouse, are entitled to income and capital while alive. Assets usually go in without immediate tax, and on death pass to the next beneficiaries outside your will.

Because the assets leave your estate, they stay out of the probate filing, the BC probate fee and the public record, and a replacement trustee can keep managing them if you lose capacity. The costs: a deed, a transfer of every asset, a yearly T3 return, and a deemed disposition when the last of you and your spouse dies, taxed in the trust. These assets are generally beyond a wills variation claim, though the trust can face other challenges.

How does a family trust work with an estate freeze?

In an estate freeze, the owner of a company exchanges their common shares for fixed-value preferred shares, locking their value for tax at today's figure. New common shares are issued to the next generation, often through a family trust. Future growth belongs to the trust's beneficiaries, and the owner's tax at death is limited to the frozen value.

The trust lets the owner choose later which descendants benefit, and in what shares, and it starts the 21-year clock covered below. A freeze needs a company valuation, a share exchange, new share issues and updated records under the BC Business Corporations Act, planned with the company's accountant.

What does it mean to fund a trust, and which assets should go in?

Funding a trust means transferring each asset out of your name and into the trustee's name. A signed trust deed with nothing transferred into it holds nothing. Each kind of asset moves by its own process, and some transfers count as a sale for income tax, so which assets go in is decided with the tax effect in view.

• Land: a Form A transfer to the trustee at the Land Title Office, a property transfer tax return and a Land Owner Transparency Registry report. It may be a disposition for income tax, with principal residence questions.
• Non-registered accounts: retitled by the institution on seeing the trust deed. Moving investments with gains can be taxable unless a rollover applies, as it generally does for alter ego and joint partner trusts.
• RRSPs, RRIFs and TFSAs: generally can't go in during life without collapsing the plan, so they pass by beneficiary designation, which can name a trustee.
• Private company shares: a share transfer under the articles, recorded in the central securities register and the transparency register, usually with a valuation.
• Life insurance: name a trustee as beneficiary, with a declaration saying how the proceeds are held.
• Belongings and vehicles: rarely worth moving; they pass under the will.

Can you set up a trust that lasts for generations in Canada?

Not in the way American dynasty trusts do. Under the Income Tax Act, most personal trusts are treated as selling their capital property every 21 years, with tax on any gain. BC's Perpetuity Act also limits how long a trust can postpone settling who finally owns its property. Families plan around both rules rather than relying on one permanent trust.

Before each 21-year date, trustees often move assets to beneficiaries resident in Canada, which can carry the cost over and defer the tax, or they pay the tax and carry on. A plan spanning generations is usually a series: a will trust, a letter of wishes, and fresh planning by each generation.

How do you pass a family business to the next generation in BC?

Passing on a family business in BC usually combines several tools: an estate freeze to move future growth to the next generation, a shareholders' agreement setting out what happens on death, disability or retirement, insurance to fund any buyout, and wills that deal with the shares. The order matters, because each step depends on the company's records and tax position.

A shareholders' agreement with buy-sell terms decides whether a deceased owner's shares must be bought, at what price and with what money, often life insurance on each owner. Without one, the shares fall into the estate.

Many BC owners sign a separate will for private company shares, so the executor can transfer them under the Business Corporations Act without including them in the probate filing. The two wills are drafted together so neither revokes the other.

Under the Family Law Act, a child's inheritance or gift from a third party is generally excluded property, but its growth during the child's relationship can be shared and the exclusion must be proved. A marriage or cohabitation agreement signed by the child adds protection; the marriage agreements page explains what one can say.

What does it take to keep a trust running each year?

A trust set up during life needs a trustee who keeps its money separate, invests under the Trustee Act standard unless the deed says otherwise, files a T3 return each year, and reports its settlor, trustees and beneficiaries to the CRA where required. Every payment and decision is recorded and accounted for to the beneficiaries.

The federal beneficial ownership reporting rules for trusts were expanded recently and some exemptions have since changed, so the obligations are confirmed each year with the accountant. A trust in a will has no running costs until it starts; after that it files its own T3 return. Trustee pay is limited by the Trustee Act unless the will or deed sets it.