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A trust fund refers to the assets held inside of a trust. A trust is simply a legal tool used to hold property for another party's benefit. The fund, in this context, consists of the assets held inside of the trust according to the trust's terms. While the term "trust fund" conjures up an image of high net-worth individuals, middle-class people are increasingly turning to trust funds so their estates avoid probate and so that they can better control how heirs receive assets.

Setting up a trust fund is one of the best ways to ensure financial security for your loved ones. This is because a trust can reduce estate taxes, eliminate probate, make investment, and schedule monthly distributions to yourself or your loved ones. Most importantly, it can protect assets from lawsuits. After all, if a greedy law firm plunders your wealth, the prior points are moot.

Moreover, a trust can can provide these benefits during your lifetime and long after you have passed. This article will discuss these advantages in detail. The bottom line is, no matter your net worth, you can create a trust fund to provide financial security for yourself and your loved ones. Incidentally, you can even use a trust to protect them from themselves. That is, if you fear your heirs might not handle their bequests responsibly, you can set up the trust fund to address those issues. Thus, with a trust fund, you can distribute your assets the way you would like.

What Is a Trust Fund Baby?

A trust fund baby refers to a person, especially a younger individual, for whom a trust was established that provides sufficient income so the individual does not need to work to earn a living. Parents or grandparents typically establish such financial arrangements in-trust that provide for the living expenses of a child, grandchild or other individual.

The stereotypical image of a trust fund baby is that of an individual living a high-society existence without putting forth the entrepreneurial exertion required to produce such a lifestyle. People envision the individual driving exotic cars, jet-setting around the globe going on exotic vacations.

In truth, according to thecut.com, those who receive trust funds represent fewer than two percent of the U.S. population. Moreover, the median amount received, they continue, is only about $285,000. Most, but not all, people who are the beneficiaries of trust funds still need to work; the trusts simply provide single lump payments or ongoing supplemental income.

Those who leave substantial estates behind often insert spendthrift provisions into their trusts. That is, the trusts appoint a trustee who limits the trust's financial outgo. Those with forethought often structure this arrangement to prevent young people from spending foolishly and "burning through" their inheritances.

Most Popular Trusts

Among the most popular tools to create trust funds are inter vivos, or living trusts. We call these tools revocable trusts. This means that the owner can make many sorts of changes to the trust during their lifetime. That includes changing or adding beneficiaries and moving assets in and out of the trust. Once the trust owner dies, however, the living trust becomes irrevocable, its provisions not subject to change.

A living trust does not hold significant income advantages. It can, however have significant estate tax advantages for the trust fund recipients. This is because the trust can divide assets into two subtrusts. Trust "A" is for the first spouse. Trust "B" is for the second spouse. Typically it works this way. When one spouse dies, the other spouse has full access to one of the subtrusts. The surviving spouse can access the income that the other trust fund produces. When both die, this arrangement doubles the amount that heirs can receive estate-tax free.

Moreover, when you set up a living trust, your estate does not go through probate. Probate is the legal process of proving that a will is valid. This process typically involves lawyers (i.e. legal fees). A judge must approve the probate process. Consequently, there are often substantial probate fees that are due as part of the process. Plus, probate is a very public ordeal that lays assets out in the broad daylight of the public records. Thus, people are turn toward such trusts to protect privacy. They use them to reduce or eliminate estate taxes and probate fees. In addition, they use them to speed up asset distribution to beneficiaries.

How Trust Funds Work

For financial and estate planning purposes, several types of trusts are available, but the two of interest to most people are the aforementioned inter vivos trust and the testamentary trust. While similar to an irrevocable trust, a person's will creates a testamentary trust fund. Therefore, it does not exist prior to the individual's death.

A grantor, also known as a settlor, is the person creating and funding the trust fund. This individual also determines the trust's management terms. The trustee, which is either an individual or financial institution, is the entity responsible for overseeing the trust. With many revocable trusts, the grantor is also the trustee. Settlor establishes the trust fund for the beneficiary. The beneficiary does not own the trust assets. Rather, the trustee managers trust assets in the best interests of the beneficiary as per the trust agreement. The grantor names the beneficiaries and the trustee.

Beneficiaries receiving money from a trust account will find that how often the money is distributed depends on the stipulations in the terms of the trust. Beneficiaries might receive all of the proceeds in one lump sum or receive payments on a monthly, quarterly or annual basis.

Biggest Mistake Parents Make with Trust Funds

The biggest mistake parents make when setting up trust funds is giving children the entire estate at once. This is especially troublesome if the trust gives a lump sum without regard to age.

Say the parents die in a car crash when the children are in their late teens or early twenties. Inherited money is easy to spend. So, it is not unusual for children to blow through inherited funds within one year.

So, smart estate planners prepare for this. Here is an example of a well thought-out trust. We often draft our client's trust so that there is a responsible third-party trust company. Below the age of 25, the trust provides for the food, clothing, housing, healthcare and educational needs of the children. So, in addition to physical needs, the trust can pay for college, for example.

Then, at age 25, the child receives one-third of the trust assets. At age 30, the child receives another one-third of the trust assets. Finally, at age 35, the child has access to the remainder of trust assets.

Alternatively, the trust is set up so there are no lump-sum payments. The trust simply provides a monthly or quarterly payout. So, there is no risk of depleting the trust.

More About Living Trusts

Living trusts are set up during the grantor's lifetime, and typically the grantor is also the trustee so they may manage the assets. Professional often design revocable living trusts to end with the grantor's death, with assets distributed to beneficiaries. While the grantor lives, he or she may buy and sell trust assets and move them in and out of trust. The grantor reports all trust income on his or her tax returns. When the grantor dies and the trust becomes irrevocable. Someone values the assets for estate purposes as of the grantor's date of death.

Irrevocable Trusts

Oftentimes, we establish trusts for clients that are irrevocable from the start. Most settlors establish these instruments to keep creditors away from assets. In addition, these trusts can significantly lower estate taxes. With an irrevocable trust, the grantor transfers assets into the trust and can receive income or lump sums according to the terms of the trust. Certain types of irrevocable trusts must file their own tax forms each year. Others simply flow through to the tax returns of the settlor without separate filings.

When a person sets an irrevocable trust without naming themselves as a beneficiary, assets in such a trust are not part of the grantor's estate. Some irrevocable trusts are quite detailed and, unlike revocable living trusts, can provide substantial asset protection benefits. That is, when a lawsuit strikes, the trust can shield the trust fund from legal attacks. The irrevocable trust often continues beyond the grantor's death. As a result, it may continue making distributions to certain beneficiaries. In these situations, the tax code considers these distributions as taxable income, payable at the beneficiary's rates.

The strongest asset protection trusts are include the Cook Islands trust (the Cook Islands are south of Hawaii) and the Nevis trust (in the Caribbean). Domestic courts do not have jurisdiction over trustees in these countries. Plus, these two regions do not recognize foreign judgments that might attempt to attach to the trust fund.

Beneficiaries and Trust Funds

Beneficiaries have some rights when it comes to trust funds, but understanding the provisions of the trust is critical. If a beneficiary does not understand how the settlor originally designed the trust and how it operates, he should contact an estate planning specialist. The specialist will explain the process and check to make sure the trust is operating as per its terms.

Current beneficiaries of trust funds may request in writing an accounting of the trust from the trustee. These beneficiaries should receive the payments granted to them by the terms of the trust. When a beneficiary does not feel a trustee is acting in their best interests, it is possible to file a court petition for trustee removal.

Beneficiaries receiving money from a trust fund account collect their funds as per the terms of the trust. For example, the beneficiary may receive all of the funds in a lump sum, or payments are sent on a monthly, quarterly or annual basis.

Placing Restrictions on a Trust Fund

When creating a trust fund, the grantor may stipulate how heirs or beneficiaries receive income. That doesn't mean the grantor can place any conditions he or she wants in the trust, as the trust must conform to the law. For example, a grantor cannot state an heir receives money only if she divorces her spouse. The trust might state that the money is limited in use for specific purposes, such as college tuition, rent or mortgage payments. The grantor may decide that heirs cannot receive assets until age 30, for example, if they think a young person may squander the inheritance. The trustee may ask for receipts from the beneficiary as proof that the beneficiary used the funds as per the trust's terms.

While the grantor cannot make an heir's divorce a condition of receiving trust funds, they do have the ability to protect the beneficiary - usually a relative - so that in case of life changes such as divorce, any settlement does not include trust assets.

While many grantors do not include restrictions in their trusts, or such restrictions are based on the age of the beneficiary, when a trust does include difficult or possibly unfair restrictions, it is necessary to head to court to make changes.

Irrevocable Trusts and Taxes

Whether beneficiaries must pay taxes on distributions from trust funds held inside of irrevocable trusts depends on the trust terms. The state in which the settlor created the trust also plays a role. The majority of people inherit assets from living trusts that become irrevocable upon the grantor's death. If the government levies taxes, they do so at the same rate as any other form of inherited asset.

Federal and State Inheritance Taxes

For persons dying in 2019, the federal estate tax exemption is $11.4 million. The IRS taxes the remaining assets above the exemption limit at a rate of 40 percent. This isn't an issue when the trust fund is set up as irrevocable from the beginning. It is, however, an issue for living trusts that become irrevocable when the grantor dies. However, even if a beneficiary inherits more than $11.4 million from the trust, the trust pays the federal estate tax, not the heir. Twelve states and Washington, D.C. levy an estate tax; but the state pays this tax, not the heir.

Some states impose an inheritance tax, although whether a beneficiary must pay such tax depends on their relationship to the deceased. Lineal heirs, including children and grandchildren, usually do not have to pay state inheritance tax. Heirs whose relationship with the deceased was not one of direct lineage or there was no familiar relationship at all will likely find themselves subject to state inheritance taxes. For 2019, the following states impose inheritance tax:

Other Types of Trust Funds

There are many types of trust funds that experts design to deal with the particular needs of the grantor and beneficiary. Many professionals design these trusts to help beneficiaries who cannot care for themselves or whom the grantor thinks does not does handle money responsibly.

If you have a child or other relative with special needs, a special needs trust fund can ensure your loved on retains a good quality of life without the risk of losing government benefits. Medicaid regulations allows special needs trusts set up in either irrevocable or revocable forms. Parents, grandparents, a legal guardian or the court are the only entities permitted to set up special needs trusts.

When naming a trustee for a special needs trust, keep in mind that the trustee must keep with government program changes and the effect any changes may have on the beneficiary. An attorney may recommend choosing a professional trustee with a thorough understanding of their fiduciary role for such a position.

A professional drafts a spendthrift trust fund ensure that a beneficiary does not waste all of the trust assets. While it is set up in a similar manner to an ordinary trust, the trust agreement contains specific language making it clear that the grantor intended to create a spendthrift trust. A spendthrift trust is irrevocable, and there are provisions such that a creditor cannot attach assets in the trust. However, a creditor can go after assets from the trust distributed to the beneficiary. For example, if the trust assets are valued at $10 million and the beneficiary receives the income, a creditor can go after the income but not the trust's principal.

Conclusion

A trust fund simply consists of assets within a trust. There are a variety of trusts that hold such funds. The best step is to contact a professional who can discuss your particular needs. There are numbers you can call on this page to do just that. In addition you can complete a consultation form on this page for more information.

Last Updated on October 17, 2020

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Questions? Call Now 24 Hrs./Day If consultants are busy, please call again. 1-800-830-1055 \ A trust fund refers to the assets held inside of a trust. A trust is simply a legal tool used to hold property for another party's benefit.

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Images #2 - Revocable vs Irrevocable Trusts

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Images #2 - Revocable vs Irrevocable Trusts

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By Reviewed By Madhuri Thakur | Dheeraj Vaidya, CFA, FRM

Trust Fund Meaning

Trust fund refers to the legal entity which is responsible for holding and managing the different assets on behalf of the other person with help of the neutral third-party where terms and condition with respect to the way by which the assets will be held or distributed will be decided by the grantor of the trust fund.

It is a separate legal entity and is set up by a person, constituting of her wealth (wealth may be cash, property, stocks, jewelry, etc) to be distributed among one or more beneficiaries after their passing. The fund also contains instructions as to how and for what the proceeds of the assets are utilized by the beneficiaries. This is taken care of by a Trustee.

Parties involved in Trust Fund

From the above explanation, it is clear that a typical trust fund has 3 parties to it -

1. Grantor - She/he is the person that sets up the fund and contributes assets to it.

2. Beneficiaries - They are the people that the grantor wants to receive parts of or all of the wealth that they will leave behind. There can be one or more beneficiaries. In the case of multiple beneficiaries, the proportion and manner in which the assets are to be distributed among them are also envisaged.

3. Trustee - A trustee is generally a person who holds assets on behalf of another person(/s) who have entrusted them with their assets. So in a trust fund, the trustee is a person who has been appointed by the grantor to manage and distribute their assets in the manner envisaged by the Grantor.

How Does It Work?

A grantor has some assets that she/he wants her spouse/children/others to have access to but only for purposes that She/he intends for it to be used, for example -fixed allowance for living expenses, college fees, down payment for the purchase of a house, etc.

She/he sets up a fund, with her assets. The trust deed will include (but not limited to) the following details-

List of beneficiaries

What portion of the fund each beneficiary gets, at what time intervals, what purposes the beneficiaries can withdraw from the fund for What purposes the beneficiaries cannot withdraw from the fund for (probably more important than the previous clause).

She/he hires a Trustee, to act on behalf of her when She/he passes away. The trustee is generally an independent third party who is trustworthy.

The trustee gets charge of her assets and will hold it on behalf of the beneficiaries until they claim it or until.the time it is distributed as per the grantor's instructions.

Top 5 Types of Trust fund

Given below are the different types of trust funds.

#1 - Revocable Trust/ Living Trust

As the name suggests, the terms of this trust can be altered even after the creation of the trust. Such funds are generally created when the grantor is alive and the grantor intends to retain access to the assets of the trust fund. The grantor is also the trustee in revocable trusts. Under this arrangement, the income earned from the assets in the trust will accrue to the grantor until the time of their death. Creditors of the grantor will also be able to recover debts from the assets of the fund, till the time the grantor is alive.

Revocable trusts usually change into irrevocable trusts after the grantor dies.

#2 - Irrevocable Trust

An irrevocable trust is one in which, once formed, the terms of the fund cannot be altered or revoked. The grantor will not be considered the legal owner of the assets in the trust fund. In addition to this, the most important point that sets an irrevocable trust apart from a revocable one is that the grantor's creditors or any litigation judgment against them cannot be claimed against the assets of the trust. An irrevocable trust also reduces the estate tax of the grantor as the assets in this fund are not considered to be held by them.

Which one is better?

Both of them have their advantages and disadvantages. And which is better for you depends on your objective of forming the trust - When the main objective of creating a trust is to make sure that your wealth is not used carelessly by your heirs, it is advisable to go for a revocable trust as it will give you control of the assets till you live.

On the other hand, if you have wealth whose value exceeds the threshold limit for estate tax applicability (which varies from state to state), an irrevocable trust is recommendable.

Apart from the classification given above, there are other types of trust funds that are formed for specific purposes, few of which are listed below -

#3 - Charitable Trust Fund

When the grantor wants his wealth or part of it to be utilized for the greater social good, a charitable trust is formed. The asset pool that is contributed by the grantor is called the Corpus fund, which is generally maintained for eternity. And the income generated from the assets is used to fund charitable causes that the grantor wishes.

#4 - Spend-thrift Trust

Such a fund is formed when the grantor believes that her heir/(s) will not use the wealth they inherit from them responsibly and hence feel the need to appoint an independent entity (the Trustee) to ensure that the assets are only used for the purposes that the grantor would permit. These funds have clauses that do not permit the beneficiaries to use the income from the fund assets against any debt or collateral.

#5 - Generation-Skipping Trust

As the name suggests, this is a tool to transfer your wealth/estate to your grandchildren/great-grandchildren directly rather than passing it onto them through your spouse or children. Such type of trust is generally designed to rid the spouse or children from high estate taxes, in cases where all of them already hold high-value estates.

In conclusion, it can be said that a trust fund is a tool used for family wealth management, family tax planning, and making sure that the family and other dependants of the grantor get the maximum use of the wealth that She/he leaves behind.

Recommended Articles

This has been a guide to what is Trust Fund and its meaning. Here we discuss the 3 parties involved in a Trust fund (Grantor, Beneficiary, and Trustee), how it works, and the top 5 types of Trusts. You may learn more about Corporate Finance from the following articles -

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What is Trust Fund? (Meaning, Types) | How Does a Trust Fund Work?

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By Reviewed By Madhuri Thakur | Dheeraj Vaidya, CFA, FRM Trust fund refers to the legal entity which is responsible for holding and managing the different assets on behalf of the other person with help of the neutral third-party where terms and condition with respect to the way by which the assets will be held or distributed will be decided by the grantor of the trust fund.

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This website lists what types and codes there are for trusts that the Canadian Revenue Agency recognizes. For every trust, the CRA lists the prerequisites for each trust.

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A trust is either:

Each trust has different tax rules.

At the bottom of this page you will find information on public trusts and public investment trusts and the different trust codes.

Trust types

Testamentary trust

A testamentary trust is a trust or estate that is generally created on and as result of the death of the person. The terms of the trust are established by the will or by court order in relation to the deceased individual's estate under provincial or territorial law.

Generally, this type of trust does not include a trust created by a person other than a deceased individual, or a trust created after November 12, 1981, if any property was contributed to it other than by a deceased individual as a consequence of the individual's death. Contact us for rules about testamentary trusts created before November 13, 1981.

If the assets are not distributed to the beneficiaries according to the terms of the will, the testamentary trust may become an inter vivos trust.

For tax years ending after December 20, 2002, a testamentary trust may become an inter vivos trust if the trust incurs a debt or other obligation to pay an amount to, or guaranteed by, a beneficiary or any other person or partnership (any or all referred to as specified party), with whom any beneficiary of the trust does not deal at arm's length.

This does not apply for certain debts or other obligations, including those:

incurred by the trust in satisfaction of a beneficiary's right to enforce payment of an amount payable by the trust to the beneficiary or to receive any part of the trust's capital

owed to the beneficiary as a result of services provided by the beneficiary for the trust

owed to the beneficiary as a result of a payment on behalf of the trust for which property was transferred to the specified party within 12 months of the payment and the beneficiary would have made the payment had they been dealing with the trust at arm's length

Inter vivos trust

An inter vivos trust is a trust that is not a testamentary trust.

The following are different types of inter vivos trusts:

Alter ego trust

This is a trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created, for which the settlor is entitled to receive all the income that may arise during their lifetime, and is the only person who can receive, or get the use of, any income or capital of the trust during the settlor's lifetime. A trust will not be considered an alter ego trust if it so elects in its return for its first tax year.

Communal organization

We consider a trust to exist when a congregation meets all of the following conditions:

has members who live and work together

follows the practices and beliefs of, and operates according to the principles of, the religious organization of which it is a part

does not permit its members to own property in their own right

requires that its members devote their working lives to the congregation's activities

carries on one or more businesses directly, or owns all of the shares of the capital stock of a corporation (except directors' qualifying shares), or every interest in a trust or other person that carries on the business to support or sustain its members or the members of another congregation

The communal organization has to pay tax as though it were an inter vivos trust. However, it can elect to allocate its income to the beneficiaries. For more information, see Information Circular IC78-5 Communal Organizations.

Deemed resident trust

A trust is deemed resident in Canada where there is one of the following:

a resident contributor

a resident beneficiary under the trust

A resident contributor to a trust at a particular time means a person that is, at that time, resident in Canada and has at or before that time made a contribution to the trust.

A resident beneficiary under a trust at a particular time is a person (other than an exempt person or successor beneficiary) that, at that time is a beneficiary under the trust, is resident in Canada, and there is a connected contributor to the trust.

A connected contributor is a person who made a contribution either in Canada, within 60-months of moving to Canada, or within 60-months of leaving Canada.

For tax years ending after February 11, 2014, individuals who had been resident in Canada for a period of, (or periods the total of which is) 60 months or less were exempted from treatment as resident contributors or connected contributors. This exemption also applies to the tax years of non-resident trusts that end before 2015 if all of the following conditions are met:

no contributions were made to the trust after February 10, 2014 and before 2015

at any time that is after 2013 and before February 11, 2014, the 60 month exemption applied in respect of the trust

These trusts are deemed resident for several purposes including:

filing income tax returns and paying income tax under Part 1 of the Act

withholding tax on amounts paid to non-residents under Part XIII

certain filing obligations relating to ownership of foreign property, money received from a given to foreign entities

The trusts are NOT considered resident for calculating a Canadian's liability when paying the trust (i.e. when a resident taxpayer pays the deemed resident trust it is requires to withhold Part XIII). They are also not considered resident for the purpose a determining a Canadian resident's (other than the trust) foreign reporting requirements.

If you need help determining whether the trust is a deemed resident of Canada, contact us.

Employee benefit plan

Generally, this is any arrangement under which an employer makes contributions to a custodian, and under which one or more payments will be made to, or for the benefit of, employees, former employees, or persons related to them.

For more information, and for details on what we consider to be an employee benefit plan and how it is taxed, see archived Interpretation Bulletin IT502 - Employee Benefit Plans and Employee Trusts and its Special Release.

Because the allocations are taxed as income from employment to the beneficiaries, report the allocations on a T4 slip, not on a T3 slip. For more information, see Guide RC4120, Employers' Guide - Filing the T4 Slip and Summary.

Employee life and health trust (ELHT)

This is a trust, established after 2009 by one or more employers, that meets a number of conditions under subsection 144.1(2) of the Act. The trust's only purpose is the payment of a designated employee benefit (DEBs) for employees and certain related persons (certain limitations apply to the rights and benefits that may be provided to key employees).

Employers can deduct contributions made to the trust, as long as they are for DEBs and meet the conditions in subsection 144.1(4). Employee contributions are permitted, but are not deductible. However, employee contributions may qualify for the medical expense tax credit, to the extent that they are made to a private health services plan.

The trust can deduct amounts paid to employees or former employees for DEBs and can generally carry non-capital losses back or forward three years. Any amount received from an ELHT must be included in income, unless the amount was received as the payment of a DEB. Payments of DEBs to non-resident employees or former employees will generally not be subject to tax under Part XIII.

For more information on ELHT's, designated employee benefits and key employees, see section 144.1 of the Act.

Employee trust

This is a trust. Generally, it is an arrangement established after 1979, under which an employer makes payments to a trustee in trust for the sole benefit of the employees. The trustee has to elect to qualify the arrangement as an employee trust on the trust's first return. The employer can deduct contributions to the plan only if the trust has made this election and filed it no later than 90 days after the end of its first tax year. To maintain its employee trust status, each year the trust has to allocate to its beneficiaries all non-business income for that year, and employer contributions made in the year. Business income cannot be allocated and is taxed in the trust.

For more information, see archived Interpretation Bulletin IT502 - Employee Benefit Plans and Employee Trusts and its Special Release.

Because the allocations are taxed as income from employment to the beneficiaries, report the allocations on a T4 slip, not on a T3 slip. For more information, see Guide RC4120, Employers' Guide - Filing the T4 Slip and Summary.

Environment quality Act trust

A trust under paragraph 149(1)(z.1) of the Act. This is a trust that was created because of a requirement imposed by section 56 of the Environment Quality Act, R.S.Q., c. Q-2. The trust must meet all of the following conditions:

the trust is resident in Canada

the only persons that are beneficially interested are one of the following:

1. Her Majesty in right of Canada

2. Her Majesty in right of a province

3. a municipality (as defined in section 1 of that Act) that is exempt because of subsection 149(1) from tax under Part I on all of its taxable income

Graduated rate estate (GRE)

A graduated rate estate, of an individual at any time, is the estate that arose on and as a consequence of the individual's death, if all of the following conditions are met:

that time is no more than 36 months after the death of the individual

the estate is at that time a testamentary trust

the individual's social insurance number is provided in the estate's return of income for the tax year that includes that time and for each of its earlier tax years that ended after 2015 (36 month period after the death of the individual)

the estate designates itself as the graduated rate estate of the individual in its return of income

no other estate designates itself as the graduated rate of estate of that individual in a return of income for a tax year that ends after 2015

An estate can only be a "graduated rate estate" for up to 36 months following the death of an individual. The estate will cease to be a graduated rate estate if it is still in existence at the end of the 36 months period.

Health and welfare trust (HWT)

Health and welfare benefits for employees are sometimes provided through a trust arrangement under which the trustees receive the contributions from the employer(s), and in some cases from employees, to provide such health and welfare benefits as have been agreed to between the employer and the employees. To qualify for treatment as a HWT, the funds of the trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made. In addition, the employer's contributions to the fund must not exceed the amounts required to provide these benefits. Further, to qualify for treatment as a HWT, the payments by the employer cannot be made on a voluntary or gratuitous basis - they must be enforceable by the trustees should the employer decide not to make the payments required. This arrangement is restricted to one or any combination of the following:

a group sickness or accident insurance plan

a private health services plan

a group term life insurance policy

Under proposed changes, starting in 2021, the CRA will no longer apply its administrative positions with respect to HWTs.

For more information, see Income tax folio S2-F1-C1 - Health and Welfare Trusts.

Hepatitis C trust and Indian residential school trust

These are inter vivos trusts under paragraph 81(1)(g.3) of the Act and are government funded trusts.

established under:

the 1986-1990 Hepatitis C Settlement Agreement

the Pre-1986/Post-1990 Hepatitis C Settlement Agreement

the Indian Residential Schools Settlement Agreement entered into by her Majesty in right of Canada on May 8, 2006

as long as no contribution to the trust, other than contributions provided for under the Agreement, is made before the end of a tax year of the trust, the trust's income is generally exempt from income tax for that tax year.

Insurance segregated fund trust

This is a related segregated fund of a life insurer for life insurance policies and is considered to be an inter vivos trust. The fund's property and income are considered to be the property and income of the trust, with the life insurer as the trustee.

Joint spousal or common-law partner trust

This is a trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created. The settlor and the settlor's spouse or common-law partner are entitled to receive all the income that may arise from the trust before the later of their deaths. They are the only persons who can receive, or get the use of, any income or capital of the trust before the later of their deaths.

Lifetime benefit trust

This a trust that is at any particular time a lifetime benefit trust with respect to a taxpayer and the estate of a deceased individual if both of the following conditions are met:

immediately before the death of the deceased individual, the taxpayer meets one of the following conditions:

was both a spouse or common-law partner of the deceased individual and mentally infirm

was both a child or grandchild of the deceased individual and dependent of the deceased individual for support because of mental infirmity

the trust is, at the particular time, a personal trust under which:

no person other than the taxpayer may receive or otherwise obtain the use of, during the taxpayer's lifetime, any of the income or capital of the trust

the trustees:

are empowered to pay amounts from the trust to the taxpayer

are required in determining whether to pay, or not to pay, an amount to the taxpayer to consider the needs of the taxpayer including, without limiting the generality of the foregoing, the comfort, care and maintenance of the taxpayer

Master trust

This is a trust. A trust can elect to be a master trust if during the entire time since its creation it met all of the following conditions:

it was resident in Canada

its only undertaking was the investing of its funds

it never borrowed money except for a term of 90 days or less (for this purpose, the borrowing cannot be part of a series of loans or other transactions and repayments)

it has never accepted deposits

each of its beneficiaries is a trust governed by a deferred profit sharing plan, a pooled registered pension plan or a registered pension plan

Mutual fund trust

This is a unit trust that resides in Canada. It also has to comply with the other conditions of the Act, as outlined in section 132 and the conditions established by Income Tax Regulation 4801. There are certain reporting requirements for a mutual fund trust that is a public trust, or public investment trust.

Non-profit organization

This is an organization (for example, club, society, or association) that is usually organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit. The organization will generally be exempt from tax if no part of its income is payable to, or available for, the personal benefit of a proprietor, member, or shareholder. For more information, see archived Interpretation Bulletin IT496 - Non-Profit Organizations.

If the main purpose of the organization is to provide services such as dining, recreational, or sporting facilities to its members, we consider it to be a trust. In this case, the trust is taxable on its income from property, and on any taxable capital gains from the disposition of any property that is not used to provide those services. The trust is allowed a deduction of $2,000 when calculating its taxable income. Claim this on line 54 of the T3 return.

For more information, see archived Interpretation Bulletin IT83- Non-profit organizations - Taxation of income from property.

Nuclear fuel waste Act trust

A trust under paragraph 149(1)(z.2) of the Act. This is a trust that was created because of a requirement imposed by subsection 9(1) of the Nuclear Fuel Waste Act. The trust must meet all of the following conditions:

the trust is resident in Canada

the only persons that are beneficially interested are one of the following:

1. Her Majesty in right of Canada

2. Her Majesty in right of a province

3. a nuclear energy corporation (as defined in section 2 of that Act) all the shares of the capital stock of which are owned by one or more persons described in clause (A) or (B)

4. the waste management organization established under section 6 of that Act if all shares of its capital stock are owned by one or more nuclear energy corporations described in clause (C)

5. Atomic Energy of Canada Limited, being the company incorporated or acquired in accordance with subsection 10(2) of the Atomic Energy Control Act

Personal trust

This is a trust (other than a trust that is, or was at any time after 1999, a unit trust) that is one of the following:

a graduated rate estate

a trust in which no beneficial interest was acquired for consideration payable directly or indirectly to:

1. the trust

2. any person or partnership that has made a contribution to the trust by way of transfer, assignment or other disposition of property

For 2017 and subsequent tax years, only a graduated rate estate automatically qualifies as a personal trust without regard to the circumstances in which beneficial interest in the trust has been acquired.

Pooled registered pension plans (PRPP)

Pooled Registered Pension Plans must operate through an arrangement acceptable to the Minister. All property held in connection with a PRPP is required to be held in trust by the administrator on behalf of the plan members. As a result, a PRPP is generally treated as a trust for tax purposes, the administrator is the trustee of that trust, the members are the beneficiaries, and the trust property is the property held in connection with the plan. A pooled registered pension plan trust will be excluded for purposes of the 21 year deemed disposition rule and other specified measures. When certain criteria are met, a pooled registered pension plan trust will be exempt from Part 1 tax.

For more information, go to Pooled registered pension plans.

Qualified disability trust (QDT)

A qualified disability trust for a tax year is a testamentary trust that arose on the death of a particular individual that jointly elects, with one or more beneficiaries under the trust, in its T3 return of income for the year to be a qualified disability trust for the year. In addition, all of the following conditions have to be satisfied:

the election must include each electing beneficiary's Social Insurance Number

each electing beneficiary must be named as a beneficiary by the particular individual in the instrument under which the trust is created

each electing beneficiary must, for the beneficiary's tax year in which the trust's year ends, be eligible for the disability tax credit

no beneficiary who elects with the trust to be a qualified disability trust for the year can elect with any other trust for the other trust to be a qualified disability trust for the other trust's tax year that ends in the beneficiary's tax year

the trust must be factually resident in Canada (i.e., resident determined without regard to section 94 of the Income Tax Act)

the trust is not subject to the recovery tax for the year

For a trust that was a qualified disability trust in a previous tax year, refer to "Line 11 - Federal recovery tax" in Guide T4013, T3 Trust Guide.

Qualifying environmental trust (QET)

Generally, this is a trust resident in Canada or a province, or a corporation resident in Canada that is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee, or that is not an excluded trust and maintained at that time for the sole purpose of funding the reclamation of a qualifying site in Canada or in the province that is, or may become, required to be maintained under the terms of a qualifying contract, or a qualifying law, and that had been used primarily for, or for any combination of:

the operation of a mine

the extraction of clay, peat, sand, shale or aggregates (including dimension stone and gravel)

the deposit of waste

If the trust was created after 2011, the operation of a pipeline, as long as the other requirements defined in subsection 211.6(1) are met

Under the definition, the trust is, or may become, required to be maintained under the terms of a contract entered into with the federal or provincial Crown of if the trust was established after 2011, by an order of a tribunal constituted under a federal or provincial law. Certain conditions exist that may exclude a trust from being a QET. For more information, please see the definition of a QET in subsection 211.6 (1) of the Act.

Real estate investment trust (REIT)

A trust is a REIT for a tax year, if it is resident in Canada throughout the year and meets a number of other conditions, including all of the following:

at least 90% of the trust's non-portfolio properties must be qualified REIT properties

at least 90% of the trust's gross REIT revenue for the tax year must be derived from rent, from real properties, interest, capital gains from dispositions of real properties which are capital properties, dispositions of eligible resale properties, dividends and royalties

at least 75% of the trust's gross REIT revenues for the tax year must be derived from rent from real properties, interest from mortgages on real properties and capital gains from dispositions of real properties which are capital properties

Registered disability savings plan (RDSP) trust

An RDSP trust has to complete and file a T3 return if the trust has borrowed money and subparagraph 146.4(5)(a)(i) or 146.4(5)(a)(ii) of the Act applies. If this does not apply and the trust carried on a business or held non-qualified investments during the tax year, you have to complete a T3 return to calculate the taxable income from the business or non-qualified investments, determined under subsection 146.4(5) of the Act. If the trust is reporting capital gains or losses, it has to report the full amount (that is, 100%) on line 01 of the T3 return.

Registered education savings plan (RESP) trusts

If an RESP trust held non-qualified investments during the tax year, you have to complete and file a T3 return to calculate the taxable income from-non-qualified investments, determined under subsection 146.1(5) of the Act. If the trust is reporting capital gains or losses, it has to report the full amount (that is, 100%) on line 01 of the T3 return.

Registered retirement savings plan (RRSP), or Registered retirement income fund (RRIF) trusts

An RRSP, or RRIF trust has to complete and file a T3 return if the trust meets one of the following conditions:

the trust has borrowed money and paragraph 146(4)(a) or 146.3(3)(a) of the Act applies

the RRIF trust received a gift of property and paragraph 146.3(3)(b) of the Act applies

the last annuitant has died and paragraph 146(4)(c) or subsection 146.3(3.1) of the Act applies. If this is the case, claim an amount on line 43 of the T3 return only if the allocated amounts were paid in accordance with paragraph 104(6)(a.2) of the Act

If the trust does not meet one of the above conditions and the trust held non-qualified investments during the tax year, you have to complete a T3 return to calculate the taxable income from non-qualified investments, determined under subsection 146(10.1) or 146.3(9) of the Act. If the trust is reporting capital gains or losses, it has to report the full amount (that is, 100%) on line 01 of the T3 return.

If the trust does not meet one of the above conditions and the trust carried on a business, you have to complete a T3 return to calculate the taxable income of the trust from carrying on a business. Do not include the business income earned from qualified investments for the trust.

Retirement compensation arrangement (RCA)

This arrangement exists when an employer makes contributions for an employee's retirement, termination of employment, or any significant change in services of employment. For more information, see Guide T4041, Retirement Compensation Arrangements Guide.

Salary deferral arrangement (SDA)

Generally, this is a plan or arrangement (whether funded or not) between an employer and an employee or another person who has a right to receive salary or wages in a year after the services have been performed. For more information, see archived Interpretation Bulletin IT529 - Flexible Employee Benefit Programs.

Specified investment flow-through (SIFT) trust

This is a trust (other than a trust that is a real estate investment trust for the tax year or an entity that is an excluded subsidiary entity) that meets all of the following conditions at any time during the tax year:

the trust is resident in Canada

investments in the trust are listed or traded on a stock exchange or other public market

the trust holds one or more non-portfolio properties

For more information, go to Specified investment flow-through (SIFT) trust income and distribution tax.

Specified trust

This is a trust that is:

an amateur athlete trust

an employee life and health trust

an employee trust

a master trust

a trust governed by:

a deferred profit sharing plan

an employee benefit plan

an employee profit sharing plan

a foreign retirement arrangement

a pooled registered pension plan; a registered disability savings plan

a registered education savings plan

a registered pension plan

a registered retirement income fund

a registered retirement savings plan

a registered supplementary unemployment benefit plan

a tax-free savings account trust

a related segregated fund trust

a retirement compensation arrangement trust

a trust whose direct beneficiaries are one of the above mentioned trusts

a trust governed by an eligible funeral arrangement or a cemetery care trust

a communal organization

a trust where all or substantially all of the property is held for the purpose of providing benefits to individuals from employment or former employment

Spousal or common-law partner trust

A post-1971 spousal or common-law partner trust includes both a testamentary trust created after 1971, and an inter vivos trust created after June 17, 1971. In either case, the living beneficiary spouse or common-law partner is entitled to receive all the income that may arise during the lifetime of the spouse or common-law partner. That spouse or common-law partner is the only person who can receive, or get the use of, any income or capital of the trust during their lifetime.

A pre-1972 spousal trust includes both a testamentary trust created before 1972, and an inter vivos trust created before June 18, 1971. In either case, the beneficiary spouse was entitled to receive all the income during the spouse's lifetime, and no other person received, or got the use of, any income or capital of the trust. These conditions must be met for the period beginning on the day the trust was created, up to the earliest of the following dates:

the day the beneficiary spouse dies

January 1, 1993

the day on which the definition of a pre-1972 spousal trust is applied

Tax-free savings account (TFSA) trust

A TFSA trust has to complete and file a T3 return if the trust meets one of the following condition:

If a TFSA trust carried on a business or held non-qualified investments during the tax year, the trust will be taxable to the extent of the income earned from that business or those investments (Type of trust code 32 on the T3 Return). For more information, see "Line 22 - Non-qualified investments for TFSA, RRSP, RRIF, RDSP, and RESP trusts" in Guide T4013, T3 Trust Guide.

When the last holder of a TFSA dies, and the trust still exists after the exempt period, it is deemed to dispose of all its property at fair market value and immediately reacquire it at the same value on January 1 following the end of the exempt period. The trust becomes a taxable inter vivos trust from that point on (Type of trust code 318 - TFSA - Qualified Investments on the T3 Return) and subject to the normal rules for inter vivos trusts. Additionally, in its first year as an inter vivos trust, the trust is taxable on any income and gains earned but not distributed during the exempt period. For more information go to Tax-Free Savings Account.

Unit trust

This is a trust for which the interest of each beneficiary can be described at any time by referring to units of the trust. A unit trust must also meet one of the three conditions described in subsection 108(2) of the Act.

Information for public trusts and public investment trusts

Public trust

A public trust is a mutual fund trust whose units are listed on a designated stock exchange in Canada.

Public investment trust

A public investment trust is a public trust in which all or substantially all of the fair market value of its property comes from:

units of public trusts

partnership interests in public partnerships

shares of the capital stock of public corporations

any combination of those properties

If you are a public trust, you must forward certain tax information to the website of CDS Innovations Inc. within 60 days after the end of your tax year. The filing period is extended to 67 days for a public investment trust.

Once you post the tax information on the CDS website, you must notify the Canada Revenue Agency CRA of the date of your compliance by emailing the notification to PUBTR-FO-G@cra-arc.gc.ca .

Trust codes

Testamentary trusts

code 001, Spousal or common-law partner trust

code 900, a testamentary trust that is not identified by one of the other testamentary trust codes

code 901, Lifetime Benefit trust

code 903, an estate that designated itself as a graduated rate estate (applicable for tax years ending after 2015)

code 904, a qualified disability trust (applicable for tax years ending after 2015 when Form T3QDT, Joint Election for a Trust to be a Qualified Disability Trust is submitted)

Inter vivos trusts

code 11, Spousal or common-law partner trust

code 12, Unit trust

code 13, Mutual fund trust

code 14, Communal organization trust

code 15, Employee benefit plans trust

code 19, Employee trust

code 20, Blind/revocable trust

code 21, Personal trust

code 22, joint Spousal or common-law partner trust

code 23, Alter ego trust

code 24, Master trust

code 28, Specified income flow-through (SIFT) trust

code 32, Tax-free savings account (TFSA) trust

code 33, Employee life and health trust (ELHT)

code 161, Insurance segregated fund-fully

code 162, Insurance segregated fund-partially registered trust

code 163, Insurance segregated fund-non-registered

code 180, Non-profit organization-subsection 149(5) trust

code 181, Non-profit organization trust-subsection 149(1)(l)

code 300, Other trust

code 301, Registered retirement savings plan (RRSP) trust liable for tax under Part I of the Act

code 302, Registered retirement income fund (RRIF) trust liable for tax under Part I of the Act

code 303, Registered disability savings plan (RDSP) trust liable for tax under Part I of the Act

code 304, Real estate investment trust (REIT)

code 305, Health and welfare trust (HWT)

code 306, Salary deferral arrangement (SDA)

code 313, Pooled registered pension plans (PRPP)

code 314, Environment Quality Act trust described in paragraph 149(1)(z.1) of the Act

code 315, Nuclear Fuel Waste Act trust described in paragraph 149(1)(z.2) of the Act

code 316, Hepatitis C trust described in paragraph 81(1)(g.3) of the Act

code 317, Indian residential schools trust described in paragraph 81(1)(g.3) of the Act

code 318, for a Tax-free savings account (TFSA) trust liable for tax under Part I of the Act

code 319, for a Registered education savings plans (RESP) trust liable fortax under Part I of the Act

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joint spousal or common-law partner trust

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mutual fund trust. non-profit organization

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A trust is either: Each trust has different tax rules. At the bottom of this page you will find information on public trusts and public investment trusts and the different trust codes. A testamentary trust is a trust or estate that is generally created on and as result of the death of the person.

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This website links to a webinar and gives a transcript of the webinar. The webinar goes into detail of how the Canadian Revenue Agency will examine the tax of the business of the grantor. It covers the topic of what to expect for the examination, what your tax obligations are, what trust accounts will be examined, and what happens while and after the examination.

I chose this website as it is good to know what the CRA will look for. It can help ease some stress when the examination happens, and it is good to know what to keep up to date on.

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Transcript
Slide 1
Hello and welcome to our webinar on what to expect during an examination of your goods and services tax/harmonized sales tax-or GST/HST-trust accounts. My name is Mathew and I am your presenter.

Today's webinar will be recorded and posted on Canada.ca later so you can refer to it in the future.
Slide 2
This webinar will be of interest to you if you have a business and collect GST/HST. Managing your GST/HST obligations can be complicated. And being notified that your business will get a GST/HST trust accounts examination can cause you some stress.

Being prepared for such an examination can go a long way toward easing your concerns. It can also help the examination go smoothly and quickly. That way you can get back your focus on running your business as soon as possible.

A GST/HST trust accounts examination is simply a review of your books and records to make sure you've done the proper calculations related to your GST/HST obligations and that you applied the laws correctly. This helps keep the tax system fair for everyone.

A trust accounts examination is not an audit. An audit is a more detailed examination of all your books and records. However, if our examination raises some concerns, your business can then be referred for an audit.

In our experience, most businesses want to do things right. Intentional non-compliance is rare. Sometimes it's just a matter of getting a little help and know-how to get back on track.
Slide 3
If you operate a business and your sales are $30,000 or more during any calendar quarter or your sales were $30,000 or more in the last four consecutive calendar quarters, you have to register for a GST/HST account and collect GST/HST on the products or services you sell.

If you have employees, the Canada Revenue Agency (or the CRA, for short) can also conduct a payroll trust examination to make sure you have collected and remitted Canada Pension Plan, employment insurance and income tax on behalf of your employees. You also have to file T4 slips. The CRA might do a payroll trust examination at the same time as a GST/HST examination.

We will not get into payroll examinations in this webinar, but you can find more information in our payroll trust examinations video at Canada.ca/cra-videos.

This webinar will explain the GST/HST trust accounts examination process. We will cover the following topics:

What are your GST/HST obligations?

What is a GST/HST trust accounts examination?

And how do you prepare for the examination?

What happens during and after the examination?

Slide 4
In most cases, if you are a sole proprietor, partnership or corporation that provides taxable supplies in Canada, you must register for a GST/HST account. That means you have to collect the GST/HST on what you sell, you hold the money you collected from your clients "in trust," and then you send it to the CRA. All GST/HST registrants also have to file GST/HST returns.

The exception to this is the small supplier. You are a small supplier if the total value of what you sell is less than $30,000 during any calendar quarter and in the last four consecutive calendar quarters. If you are a public service, you're a small supplier if the value of what you sell is less than $50,000 during any calendar quarter. For GST/HST purposes, a public service is either a non-profit organization, a charity, a municipality, a school authority, a hospital authority, a public college or a university. Small suppliers do not need a GST/HST account.

As a GST/HST registrant, you may also claim a tax credit, which brings us to the discussion about net tax.
Slide 5
We've established that you collect GST/HST from your clients. At the same time, you likely also pay GST/HST for the purchases you make for your business. As a GST/HST registrant, you can recover some of that GST/HST by claiming an input tax credit, which we call an ITC for short. You might be able to claim ITCs if your purchases and expenses are for things you consume, use, or supply in your commercial activities.

For example, a long haul trucking business may choose to claim an ITC for the GST/HST they reimburse to their drivers for meal and entertainment expenses they incurred in Canada. For more information on what ITCs your business could be eligible for, take a look at form RC4022 found on Canada.ca/cra-forms-publications.

The difference between the GST/HST you collect and the ITCs you claim is the net tax. You have to calculate your net tax for each GST/HST reporting period and report this on the GST/HST return. For instructions on how to calculate your net tax, go to Canada.ca/cra under the Taxes tab and then click on GST/HST.
Slide 6
Once you have calculated your business's net tax, there are two ways you can file your GST/HST returns.

First, you can file monthly or quarterly. If you have a monthly or quarterly reporting period, you have to file your GST/HST return and remit any amount owing one month after the end of your reporting period.

Second, you can file once per year. If you report annually, you usually have to file your return and send the CRA any amount owing three months after the end of your fiscal year.

You may also have to pay quarterly instalments. In that case, each instalment payment is due one month after the last day of the fiscal quarter.

It's important that you file your GST/HST returns on time. If you own or operate a sole proprietorship or partnership and have not filed, the CRA will hold your personal income tax refund. The hold will be lifted when you file your GST/HST return.

If you are a mandatory electronic filer, you should file through GST/HST NETFILE. To find out if you are a mandatory electronic filer, consult Guide RC4022.
Slide 7
As I mentioned earlier, a GST/HST trust accounts examination is a review of your books and records to make sure you properly calculated the GST/HST you collected, your input tax credits, and the net tax. We also make sure you file overdue GST/HST returns.

Remember that the trust accounts officers are there to help. You can ask them any questions you may have about your GST/HST and employer payroll obligations.
Slide 8
You should ensure that you have overdue GST/HST returns prepared and ready for review. Maintaining documents in an orderly fashion and staying organized helps the trust accounts officers complete the examination quickly. It is important to make sure your books and records are accurate and up to date. They should include invoices, receipts, source documents, bank statements, and etc. They also should be easily accessible, either electronically or on paper.

If you need some help, the CRA's free Liaison Officer Service helps small businesses get their tax obligations organized. Liaison officers are available across Canada to help you understand your tax obligations and avoid common errors that could cost you time and money. Find out more at Canada.ca/cra-liaison-officer.
Slide 9
So, let's say you've been selected for a GST/HST trust accounts examination. There are many reasons you might be selected for a Trust Account Exam. Some of these include non-compliance, referrals from other CRA sections, and certain situations that cannot be resolved with a simple phone call.

First, an examination officer will call or send you a letter to set up an appointment with you or your authorized representative. At that time, they will explain what books and records they will need for the examination. For example, you'll be asked to produce completed and signed GST/HST returns for any overdue periods.

Examination officers who call your business may ask for your business account number and other information to verify your identity. An Examination officer will never ask you for immediate payments by e-transfer, PayPal, interact or others, and will never use aggressive language.

To learn about how to protect yourself from scams, visit Canada.ca/tax-tips and click on "What to expect when the Canada Revenue Agency contacts you".

The examination officers are there to help you. Feel free to ask them any questions you may have.

During the examination, the officer will review your books and records. They may ask questions about how you charged, remitted and reported the GST/HST. Please be as open and honest as possible. Be prepared to explain any actions you took.

If you cannot provide your GST/HST return, the officer may use the records reviewed, information slips, business income reported on your personal tax return, or information from earlier GST/HST returns to assess the overdue periods.
Slide 10
When the examination is finished, the officer will provide you with the findings of the examination in a statement of account. They will explain the contents of the statement, including penalties charged and any applicable interest.

If the trust accounts officers find you owe an amount at the end of the examination, you can pay it by cheque directly to the officer, or through various online options, which the officer will explain.

If the examination was conducted through your authorized representative, the officer will contact you to discuss the findings and a statement of account will be mailed to you. If you have any questions, please contact the examination officer.
Slide 11
After the GST/HST trust account examination, the CRA processes the GST/HST returns you provided to the officer. If you did not provide any returns or if significant problems are identified during the examination, your file could be referred for an audit.

The CRA will send you a notice of assessment or reassessment after your returns are processed.Contact the examination officer if you have any questions.

If you don't agree with the notice of assessment, you can file an objection with the CRA within 90 days of the assessment. To file an objection, use Form GST159 Notice of Objection (GST/HST). Make sure to include all the relevant facts and explain why you disagree.
Slide 12
If you're looking for more information about your GST/HST obligations, we recommend the following two CRA publications:

Guide RC4022, General Information for GST/HST Registrants; and

Guide RC188, Keeping Records

These are both available at canada.ca/cra-forms-publications.
Slide 13
Thank you for watching.

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What to expect during a GST/HST trust accounts examination - Canada.ca

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Slide 1 Hello and welcome to our webinar on what to expect during an examination of your goods and services tax/harmonized sales tax-or GST/HST-trust accounts. My name is Mathew and I am your presenter. Today's webinar will be recorded and posted on Canada.ca later so you can refer to it in the future.

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Website #2 - How to setup your family trust in Canada

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Website #2 - How to setup your family trust in Canada

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For this website, it shows the steps on how to setup a family trust. There are three conditions that have to be met before a trust fund can be opened. After, the name of the trust, grantor’s name, trustee and date of publication must be put into a deed to make it official.

I chose this website as it labels what processes need to be done before one can open a trust fund. This is beneficial for people wanting to open a trust fund for the first time.

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How to Setup your Family Trust in Canada

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Learn how to setup a family trust in Canada and understand the relationship between trustees, beneficiaries and the settler.

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This website illustrates and goes into detail on what Trust Funds are. It gives a detailed answer to 4 of the main questions that most people will ask when researching about Trust Funds: What is a Trust Fund? Who uses one? How does it work? How people can set one up.

I chose this website as it answers most of people's questions who are looking into opening a trust fund or attempting to understand why it is beneficial to open one.

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Whenever you hear the word trust fund, you might envision some spoiled kid who'll never have to work a day in their life. You might think trust funds are just for the ultra-wealthy. But as with so many personal finance topics, it's more complicated than that.

Trusts can actually be helpful estate planning tools. If you want to preserve your wealth and potentially avoid having the state divide your assets upon incapacitation or death, funds held in trust might be of interest to you and your family.

What is a trust fund?

The term trust fund refers to assets that are held in a trust. In essence, the trust has funds or assets that are created by a grantor, managed by a trustee and eventually distributed to beneficiaries. Assets that can fund a trust vary and could include one or more of the following:

A trust is a rulebook of sorts that determines how your wealth and assets will be distributed to beneficiaries in a specific way and at specific milestones.

The trust itself doesn't hold any assets, per se, but it does determine how they are handled and who has access to them. People use trusts to avoid probate, reduce taxes, preserve privacy in asset transfer and give to charitable causes.

Knowing more about trusts will help you determine if this is an estate planning tool worth exploring for your personal use.

Who needs a trust fund?

Although you might think trusts are for the mega-rich, you'd be surprised at how accessible and appropriate they may be for anyone's financial planning needs. There are different types of trusts that might be best for varying degrees of net worth and asset types. The administrative costs related to setting up and maintaining each type of trust vary, too.

You should consider a trust if you have a substantial amount of assets in terms of cash, stocks bonds, real estate, and business interests. If you'll want to reduce your tax exposure and avoid the probate process while transferring your assets to your heir, then you should consider creating a trust.

How does a trust fund work?

A trust is a legal entity that is set up to manage and distribute your assets. It works through legally binding terms that dictate how your wealth is managed at various points in your life. One way to think of a trust is as a "mini corporation" that handles your money. The terms of the trust are like the corporation by-laws that determine how the trust should operate.

If you are the person setting up the trust you are considered the grantor, or trustor. As the grantor, you designate a trustee which is a neutral third party who administrates the fund's operation and distribution of assets to beneficiaries. Beneficiaries can be your individual heirs, a group of people, a corporation, or a charity.

Depending on the type of trust you have, can also be the trustee or designate one. The trustee could be one of your beneficiaries or you can choose a corporate trustee. A corporate trustee can be a trust company that has vast knowledge on matters pertaining to managing a trust.

A child can be named trustee although they would likely still need support regarding tax, accounting, and legal issues. Either way, professional help is needed to set up and administer the assets of trust. The costs associated with the management of a trust should also be considered and discussed with your financial advisor and estate lawyer.

Trusts operate differently based on the type of trust you decide to set up. Though there are many types of trust, the most common distinction is between a revocable trust and an irrevocable trust. A revocable trust remains in effect while the grantor is alive and can be changed, terminated or altered while the grantor is alive. In this case, the grantor can also be the trustee and beneficiary until their incapacitation or death. An irrevocable trust cannot be changed during the lifetime of the grantor nor cannot it be terminated upon the grantor's death. A revocable trust becomes irrevocable once the grantor dies.

The type of trust you will need is based on your goals. Formerly, a revocable trust was desirable when it came to protecting an estate from taxes. However, recent changes in the U.S. tax code have made this issue somewhat moot for the vast majority of people, as the current exemption on estate taxes is $11.4 million per individual.

Consequently, the best use for the revocable might be in the case of incapacitation. If this were to occur, you could use this type of trust to designate a trustee to act on your behalf when you are unable to do so. Another benefit of this type of trust is that it may not be subject to the probate process, allowing you to transfer assets to your beneficiaries without court involvement.

An irrevocable can be used to protect assets from creditors, taxes and even claims of beneficiaries. This type of trust can also remove assets from your estate to reduce or eliminate estate and gift taxes. This type of trust would be ideal if you've got a sizable estate-perhaps in the multi-million dollar range or more.

When setting up trusts you need to be mindful of the costs it takes to create and administer them. Because a trust can be cost-prohibitive on many accounts, you need to make sure that you've got a sufficient amount of assets to help cover those costs. You'll also want to make sure the administrative costs don't erode the value of your estate, either.

Not all trusts are expensive. For example, a simple land trust can be just a few hundred dollars to create and much less than that to maintain it on an annual basis. There are other types of trusts that you should know about, as well:

Marital trusts: This trust is designed to transfer assets from one spouse to another. The benefit of this type of trust is that assets can be transferred to a surviving spouse without tax consequences.

Charitable trust: This trust can accomplish philanthropic goals. The charitable trust allows you to give money to causes you care about when you pass away. There are different ways to set up this type of trust such as giving a lump sum or a series of payments over a certain amount of time.

Generation-skipping trusts: This trust is designed to transfer assets to your grandchildren. It will help you avoid paying estate taxes when assets pass to your children and then again to your grandchildren.

Insurance trust: Another type of irrevocable trust, is set up to be the primary beneficiary of a life insurance policy. Upon your death, the proceeds of the policy are held in trust and distributed to the beneficiaries named in the trust in increments over their lifetime or until the funds run out.

Special needs trust: This trust will ensure your special needs beneficiaries are taken care of in the case of your death. Having this trust in place should not hinder their ability to receive their government benefits.

Spendthrift trust: Ideal for beneficiaries who might be at risk for squandering their inheritance with imprudent spending habits. This kind of trust can remain in existence for a period of time after the grantor dies so that funds can be distributed over a period of time to beneficiaries rather than all at once.

How to set up a trust fund

Once you determine that you've got enough assets that warrant the establishment of a trust, it's a good idea to put your trust in place.

To set up a trust, you'll want to engage the help of both a financial planner or advisor and an estate lawyer. Your financial advisor can help you identify some financial goals along with desires you might have for your wealth once you die. They can also give you information on the various types of trusts to choose from along with ideas on what might work best for your situation.

An estate lawyer can capture these desires in the provisions of the trust known as the trust agreement. In this agreement you'll need to outline:

Wills vs Trusts

A will is another estate planning tool that can help carry out your desires for distributing your assets upon your death. A will can be much less expensive to prepare and administer but it may not have the same flexibility as a trust.

For instance, even if you have a will, a will, unlike a trust, must be "proved" in probate court upon your passing. You should also be aware that the probate process is documented on public record. As each stage of the probate process goes on, these records are updated in the jurisdiction wherein the probate proceedings take place. For some, this lack of privacy can be unsettling-especially those who expect to pass on large sums of wealth to their beneficiaries.

A trust is ideal for people want to transfer assets with privacy and with the least amount of tax exposure possible.

In some cases, a will and trust can work together. For instance, it's not uncommon for people to take title to real estate in a land trust, then give more detail around what they want to happen with the trust in the language of their will. This can work with other asset classes as well but real estate is probably the most known example of how a will and trust can work in tandem.

Last Updated May 14, 2020

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Whenever you hear the word trust fund, you might envision some spoiled kid who'll never have to work a day in their life. You might think trust funds are just for the ultra-wealthy. But as with so many personal finance topics, it's more complicated than that.

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This video goes over how trust funds get taxed. There are two ways of putting trusts and assets into the trust fund: revocable and irrevocable. Revocable trust fund allows you to take assets you have put into the trust. Irrevocable trust fund does not allow the grantor to take the assets out.

I chose this video as it gives a brief idea as to how trust funds are taxed and what situations you may end up in depending on which type of trust you choose.

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How Do Trusts Get Taxed?  Basics of Trust Taxation & Can They Pay No Tax?

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Video #3 – Protect Your Assets Using Trust Funds

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Video #3 – Protect Your Assets Using Trust Funds

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Andrei Jikh’s video about Trust Funds is well produced, insightful video. He goes into why you should set a Trust Fund up by giving examples of what happens when you do not. He briefly reviews what a trust fund is and goes in depth with the 5 documents you will need to set up a trust fund. The 5 documents are as follows: Last Will and Testament, Durable General Power of Attorney, Healthcare Power of Attorney, Living Will and Living Trust.

These documents are essential in creating a trust and that's why I chose this video.

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Video #2 - How can trusts help protect assets

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Video #2 - How can trusts help protect assets

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This video goes in depth with how trusts can be used to help protect family assets after the grantor’s passing. It also goes into the benefits of the two types of trust, such as bare and discretionary trust. The bare trust is fixed, which means the beneficiary will get a set amount regardless of any changes or terms that cannot be met. Discretionary trust is flexible which can change depending on any changes to the terms the grantor has requested.

I chose this video as it gives a better idea into what type of trust you can set up and understand what each type of trust is for.

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How trusts can help to protect family assets

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In the video, it goes over the basics of how trust funds work which is great for younger people and people who are thinking about trust funds. It gives you information on what you can set your trust funds up for and when it is a good idea to set one of up.

I chose this video as this gives a brief idea of what trust funds are and what they can be used for. The video being short in length aids it as most people who want to get a brief understanding most likely will invest time in a longer video.

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Welcome! For this pallet I will be discussing about Trust Funds. I have chosen Trust Funds as I have always been interested in how they work and how they are managed by institutions.