Most people have heard of a trust but do not know what it is.
The following column will explain the basic concept of a trust, the types of trusts available and there uses.
The basic concept of a trust is relatively straightforward. A trust is a legal relationship governing the use and benefit of particular property. A settlor contributes property to the trust and generally appoints one or more trustees and one or more beneficiaries (or a trust is imposed by law).
The trustee, who has strict fiduciary duties to the beneficiaries, holds legal title to the property and manages it, and distributes the income and/or capital of the trust to the beneficiaries. The type of trust or the terms of the trust set out the nature and extent of the trustee’s discretion in distribution and each beneficiary’s interest.
Some trusts arise by operation of law without intentional creation.
A resulting trust is presumed where property is transferred gratuitously, or where an intentional trust, a gift or a will, fails.
For example, a trustee in bankruptcy holds the estate of the bankrupt in trust for the bankrupt’s creditors. An executor holds the deceased’s estate in trust for the creditors and beneficiaries of the estate. Constructive trusts are imposed by courts as a remedy for unjust enrichment, primarily as a means of property division in common-law separations.
Trusts in favour of various government agencies are often imposed by statute over funds that an employer or business is obligated to collect or withhold and remit to the government, which gives the government agencies priority over other creditors should the employer or business go bankrupt without having made the required remittances.
Trusts that are created intentionally are used widely in estate planning and business. In wills, trusts are often set up to provide some measure of control over property after death. For instance, a grandparent may leave property for a grandchild in trust, not to be distributed until the child reaches a certain age.
A trust may also be settled to benefit a person who due to illness, disease or addiction is not capable of properly managing or dealing with property on his own. In business, joint ventures often appoint a corporation as trustee to hold and distribute the property of the joint venture.
An infamous (and quite complicated) example of a business use of the intentional trust is the income trust, which rose to such popularity because it resulted in less taxation (and therefore better rates of return for investors) than the standard corporate structure.
As with the income trust, a primary reason for using an intentional trust is tax planning. For instance, in certain circumstances, the owner of an incorporated business may be able to settle shares of her corporation into trust for her children to split income and use each child’s capital gains exemption in addition to her own to shelter more of the capital gain on the eventual sale of the corporation.
In summary, though the concept of a trust is relatively straightforward, trusts are created and arise in a variety of different circumstances for a variety of different reasons.
Considering talking to your lawyer should you find yourself in a situation where you suspect a trust might have arisen by operation of law. In addition, consider talking to your lawyer, accountant and financial planner about whether an intentional trust can benefit your business or estate planning.
Legally Speaking appears every second week in LIFE. It is intended for information purposes only. Readers with a specific legal problem should consult a lawyer. This week’s column was written by James Cawsey, of the Red Deer law firm Duhamel Manning Feehan Warrender Glass. Cawsey can be reached at 343-0812 or at www.reddeeraltalaw.com.