Canada reports thousands of new COVID-19 cases every day and more than 14,000 deaths to date. With these numbers, it’s no surprise that more Canadians are getting their wills done. As Global News reported in April 2020, they’re flocking to estate planning services such as Willful. Some companies reported a fourfold increase in business since March 2020. But is a will your only estate planning option? Living trusts work a little differently than wills, but they offer unique advantages. Learning more about trusts can help you make wise decisions for your family’s future.
Differences Between Wills and Trusts
Both wills and trusts do the same thing – transfer assets to beneficiaries. But a will only takes effect after its creator dies. Yet even then, this doesn’t happen right away. There’s the probate process, which verifies whether a will is legally valid. It all oversees an estate’s debt payments and asset distribution. The entire probate process can take more than a year to finish. If your estate is more complicated than usual, probate can last several years.
Like a will, a living trust is a legal document. You may hear it called an “inter vivos trust.” The grantor, or the person creating the trust, must write a trust agreement. Investopedia clarifies that the trust itself is a legal entity that owns whatever assets are put into it. Trusts can contain physical assets, financial accounts, and investments. A living trust may also hold intangible assets such as digital files, social media accounts, and intellectual property. Your trust can even include ownership stakes in private businesses.
How Living Trusts Work
A trust agreement spells out how and when to transfer the grantor’s assets. This agreement usually includes three or four parties:
- Trustor
- Trustees
- Successor trustees
- Beneficiaries
Asset transfers usually happen when the grantor dies. However, they can also occur if that individual becomes incapacitated. Of course, all this depends on the specific instructions contained in the trust agreement.
Revocable living trusts are the most common type in estate planning. That’s because trustors can update them at any time. You can add or remove assets, change distribution instructions, update beneficiaries, and more. Investopedia adds that a revocable trust’s grantor can also be a trustee. Successor trustees take over the trust’s management when the primary trustees cannot. For instance, you could name your adult children as successor trustees.
Benefits and Disadvantages of Living Trusts
Like any other estate planning tool, living trusts have their pros and cons. MoneySense explains that assets in a trust do not go through the probate process. The trust itself also remains private. Information about its contents doesn’t become public knowledge unless it’s legally contested.
The major drawback to living trusts is their cost. MoneySense mentions that annual tax filings are required. As a result, many trust creators need professional tax and legal advice. Canadians may also take a bigger hit in the pocketbook at tax time. That’s because trust incomes are taxed at a combined federal and provincial rate, which works out to around 50%. This is much more than what U.S. trustors pay – that’s why living trusts are more popular south of the border. Some assets can’t be put into a trust, MoneySense adds, so you still may need a will and an executor to make sure your wishes are carried out.
Choosing the Right Planning Tools
Estate planning is as individualized as designing a wedding or a funeral. Wills and living trusts are powerful planning tools, but they use different approaches. Understanding how these tools work, plus their benefits and drawbacks, is important. Selecting the best methods and strategies is key to ensuring that your family is taken care of after you’re gone.
