How to Set Up a Trust for Your Grandchildren in Canada
As a grandparent, you might also be thinking about your grandchildren's long-term well-being and financial security.
One way to help them achieve their goals in life is by ensuring their financial security and stability, which can also be a wonderful way to express your love and support.
While there are various ways to provide this support, establishing trust funds is one of the most reliable options for this purpose.
By setting up a trust fund, you’ll be able to set aside assets and manage their distribution for your grandchildren’s benefit.
To help you understand everything you need to know about trusts in Canada, this article will guide you through the process of establishing one along with other considerations to keep in mind along the way.
What is a Trust Fund?
A trust fund is a typical legal arrangement where specific assets are held for the benefit of another person, usually through a third party. It’s a legal method to manage and provide a property to someone else.
How Does a Trust Fund Work?
While the inner workings of a trust fund might vary depending on a few aspects, they typically share the same framework and key players involved, which are typically four.
A trust fund is simply the guidelines that control the relationship between these aspects, which are:
The settlor: This is the person who creates the trust and contributes to its assets through money, property, etc. In this example, this is the grandfather.
The Beneficiary: This is the person who will ultimately receive the benefits or assets from the trust. There can be multiple beneficiaries per trust fund, and the settlor can specify how and when they can receive the trust property. In this example, these are the grandchildren.
The Trustee: This is an individual or institution that the settlor appoints to manage the trust's assets according to instructions.
The Trust Property: These are the actual assets that are placed in the trust, which are typically in the form of cash or real estate, but can also be in various other forms including investments, personal belongings, stocks, bonds, etc. It can also be a collection of various aspects.
The grantor sets the rules and instructions for the trust in a legal document called a “trust deed”. This will specify things like how the money is invested, when the beneficiary gets it, and how much they get at a time.
One thing to keep in mind here is that a trust fund is not a separate legal entity. The assets in the trust are still considered part of the settlor's estate for legal purposes, as the trust agreement only outlines how these assets are managed and distributed without incurring liability.
Types of Trust Funds
Another important aspect to understand about trust funds is that they can come in various forms. To help you understand how they work and which one to choose, here’s a brief overview of the common types of trust funds:
Living Trusts
A living trust, also known as an “Inter Vivos Trust”, is a type of trust fund established when you (the settlor) are still alive.
It allows you to transfer ownership of your assets to the trust, while still retaining control and the ability to benefit from them during your lifetime.
The flexibility of the living trust makes it one of the most reliable and commonly used forms of trust, as it can exist in a huge variety of forms. The Government of Canada recognizes over 31 different subtypes of living trust, such as Alter Ego and Joint Spousal Trusts.
Testamentary Trusts
A testamentary trust is a type of fund that the settlor establishes as part of their will or through a court order regarding the deceased individual's estate under provincial law.
In other words, the settlor creates a will and includes instructions for the creation of a testamentary trust where they specify assets to be transferred, the beneficiaries, and how the trust should be managed.
Upon the settlor’s passing, the assets designated in your will are transferred to the trust, and the named trustee takes control.
In the past, testamentary trusts offered tax advantages through estate freeze, particularly for long-term trusts designed to hold assets and distribute them over a longer period.
However, changes in Canadian laws reduced the effectiveness of this advantage, which made testamentary trust fall slightly out of favor in recent years.
Registered Education Savings Plan (RESP)
While an RESP is not a Trust, it can be an effective way to contribute to the education of a grandchild
Unlike traditional trusts which can have multiple purposes, the contributions of this fund are specifically held and invested for the beneficiary's future education.
The main advantage of this type of fund is that the government (through the Canada Education Savings Grant) matches up to 20% of your annual contribution, although the matching is capped at $500 per beneficiary.
However, the downside here is that this grant has a lifetime contribution limit of $50,000 per beneficiary. In other words, you may contribute any amount you wish annually, as long as the total contributions don't exceed that limit.
Benefits of a Trust Fund
Besides building a brighter future for your grandchildren, setting up a trust fund comes with a wide variety of advantages that can benefit both settlors and beneficiaries. In this section, we’ll take a closer look at those benefits:
Covering Education Costs
One of the main goals of setting up trust funds is to provide a dedicated resource for your grandchildren's education.
This can massively ease the burden on both grandchildren and parents and ensure that your beneficiaries have the opportunity to pursue their academic goals without being weighed down by hefty college debt.
Avoiding Probate Fees
Setting up a trust can save both the settlor and the beneficiaries a lot of money in the form of fees and taxes. For instance, The legal process of validating a will and distributing assets, known as probate, can be a time-consuming process that includes various fees.
According to Canadian laws, family Inter Vivos Trust is not subject to these fees upon death, which is why a lot of families use trusts for that purpose.
Financial Security
If you want to ensure that your grandchildren have a financial backup or a safety net, setting up a trust fund would be an ideal solution.
You can also specify various situations where the funds are managed and distributed to support them in the case of an emergency.
Asset Protection
Another reason to consider setting up a trust for your grandchildren is to protect their assets in the case of financial difficulties.
This is because the assets in a trust fund are shielded from the creditors of the beneficiary, limiting their access to your grandchildren’s funds.
Inheritance Planning
As previously established, specific types of trust funds like testamentary funds are typically associated with wills.
This allows you to specify when and how your grandchildren receive their inheritance, especially if you want to ensure responsible financial management.
What to Consider Before Setting Up a Trust
Before setting up a trust for your grandchildren, there are a few points that you need to keep in mind, as they may affect your process and how you choose to proceed. Let’s check them out:
Grandchildren’s Age
Of course, you can set up a trust to include grandchildren of any age as beneficiaries. However, you might want to keep their age groups in mind while setting it up.
For example, if there’s a large age gap between your grandchildren you can structure the trust to provide for the younger ones' future needs while allowing earlier distributions for the older ones upon reaching specific milestones.
Number of Grandchildren
If you have a single or small number of grandchildren, setting up the trust would be a fairly straightforward process, especially if there’s a way to confirm that you won’t have any new grandchildren in the future (eg. deceased parents).
On the other hand, if you have a large number of children and grandchildren, the trust may need to be more complex to ensure fair and equitable distribution of your assets.
In that case, you may need to create separate trusts for each grandchild so that it’s more personalized, giving you more control over how each one receives their share.
Alternatively, some grandparents create separate pots for each family to ensure that the number of future grandchildren doesn’t unfairly harm cousins. Consulting a reliable professional on how to proceed here will unlock a variety of solutions for you.
Tax Implications
Under Canadian laws, trust funds are a taxable entity the same way an individual or a company is.
The trustee you choose will be responsible for filing various eligible taxes for the assets in the trust, depending on their nature, including T3 tax returns, which is why you need to have a reliable trustee to ensure proper reporting of taxes to protect your assets.
Choosing a Trustee
Selecting the right trustee is arguably the most critical decision when setting up a trust fund for your grandchildren.
This individual will be entrusted with the responsibility of managing the trust assets and ensuring they are distributed according to your instructions, guidelines, and wishes. That’s why you have to consider the following aspects while choosing them:
Trustworthiness to safeguard the trusted assets
Responsibility and reliability
Financial literacy to properly manage your assets and handle recordkeeping
The ability to make tough decisions and accept liability
Consistency and charging costs
Setting up a Trust Fund
Now that you know more about trust funds for grandchildren, here’s a step-by-step guide outlining the process of setting up a trust fund for them.
1. Decide on the Type of Trust You Need
As previously established, there are different types of trust funds out there that can benefit your grandchildren.
While choosing the ideal one might feel overwhelming, having the right type of guidance during this process can help you pick the ideal option for your needs.
Consider consulting a reliable business lawyer who’s equipped with the knowledge and expertise to offer advice. Parr Business advisors can discuss your goals for the trust and showcase all the eligible options to help you make an informed decision
2. Choose a Trustee
Another critical step that experienced advisors at Parr Business can guide you through is choosing the trustee.
As previously established, the trustee’s role requires someone you trust to handle financial matters and make sound decisions regarding the trust's assets to protect them.
Of course, the complexity of your trust will dictate the qualifications necessary for the trustee you’ll appoint.
3. Draft a Trust Deed
Once you’re settled about the type of trust and the identity of the trustee, you’ll need to sit down and draft the trust deed while seeking the help of a qualified professional.
This is another aspect where the expertise and reliability of Parr Business can help you, as it’ll help you navigate the legal and paperwork aspects of the trust deed with confidence and clarity.
4. Fund the Trust
After discussing and writing down all the details of your trust, it should be ready to be established.
You’ll then need to start funding your trust as per the agreement, which can include single and multiple types of assets that you’re planning to leave for your grandchildren. You can also continue funding the trust for a long time after establishing it.
5. Ongoing Management
Lastly, while this isn’t exactly a step, ongoing management is crucial for the trust fund, as it’s the period where the trustee receives the responsibility of managing the trust according to the deed’s terms.
Keep in mind that you may be able to retain the rights to adjust various aspects of the trust, which can also be discussed with your lawyer while setting it up.
Final Comments
Setting up trust funds in Canada gives you control over how your assets are managed for the benefit of your grandchildren's future.
Besides offering them financial stability, it’s also a great way to protect their financial interests, help them avoid probate, and benefit from various tax advantages.
Setting up the trust deed can get complicated but things are much easier when you have the right guidance on your side, so make sure that you contact Parr Business if you have any further inquiries.
