Trust Structures

Structures Using Trusts

A "trust" is another kind of legal structure. It's a very old legal structure, going back hundreds and hundreds of years. It's not something that you come across every day, but in its place it serves a useful purpose. You know you're into advanced areas when you're thinking about setting up a trust in your business or personal life. (We call a trust a "structure", because that's easier to understand in this context. Strictly speaking, a trust is better thought of as a particular kind of relationship among the people involved in the trust: settlor, trustee, beneficiary, and, optionally, protector.

The people involved in a trust are the following:

• The "settlor", who is the person who gives the initial item of property (often a gold coin) to the trust, and who then disappears (usually; because of certain tax rules in Canada; it is possible to have continuing involvement of the settlor, if you're willing to accept the consequences of certain tax rules). 
• The "trustee", who is the person who receives the property and is entrusted (hence the name) to hold and manage that property and other property acquired by the trust.
• The "beneficiary", who is the person for whom or to whom the ultimate benefit of the trust property is to accrue.
• Optionally, the "protector", who is a person the trust deed specifically appoints to carry out certain functions, either more broadly or more narrowly, without being the settlor or an actual trustee. Historically, protectors were not a recognized part of trust law. In the modern use of trusts, they have found a certain place. Often, the protector in a Canadian trust will be someone authorized to appoint and perhaps remove trustees. A well-drafted trust deed will be specific as to the scope of a protector's involvement in the trust.

A trust agreement sets up the relationship between the parties involved and the rules that the trustee, beneficiaries and protector (if one exists) must follow. There are complications that we won't go into here.

In terms of ownership of the trust property, the trustee has what we call "legal" ownership of the property. The trustee will be listed as the registered owner of the property, and will have full legal authority (subject to the terms of the trust agreement itself) to deal with the property. To any outsider of the trust, the trustee will appear to be the full owner of the trust property. However, the trustee does not hold "beneficial" ownership of the trust property; that's the realm of the beneficiary. Think of the beneficiary as being the ultimate owner of the trust property. But at the same time the beneficiary doesn't really control the property; that's the trustee's job. (if you remember your high school chemistry, in a carbon molecule, electrons are shared between the carbon atoms -- you can't really say that any particular carbon atom "owns" a shared electron. In a certain sense, trusts are useful because they also blur the concept of "ownership" of the property that falls inside the trust. But don't take the analogy too far. The law of trusts assigns to both trustees and beneficiaries certain defined roles, rights and responsibilities.)

Trusts are used for many different purposes. They're not all that efficient for income tax purposes any more, but they have their place, often where control over an asset is important while ultimate ownership -- entitlement to the financial rewards -- is less important. One major benefit is that they can be used in situations where you want to muddy the waters as to who actually owns an asset. If the trust has been structured properly and well ahead of time, trusts can also be used to protect assets in a divorce or separation or against other kinds of creditors -- or at least provide more negotiation leverage than without having the trust, even if the protection ultimately isn't there. In a business setting, a trust can be a partner in a partnership or a shareholder in a corporation. For business owners, a trust can also be used to set up a special pension plan for your business, kind of an RRSP on steroids.

Before setting up or using a trust, you'll want to obtain full income tax advice from a qualified adviser, as there are plenty of income tax wrinkles to look out for. And creating the trust agreement will involve some detailed legal work.

INC Business Lawyers will be pleased to help in creating your particular trust structure. Contact Us today.

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