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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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A trust can be used for a wide variety of personal and commercial purposes. If you are considering a trust as part of your estate plan or business structure, it will be important to understand what a trust is, the duties and powers of trustees, and the rights of beneficiaries.
A trust is not a legal entity, although it is treated as such for Canadian tax purposes. A trust is simply the word used to describe the relationship created when property is transferred by one person (the “settlor”) to another (the “trustee”) to hold for the benefit of specified persons or a class of persons (the “beneficiaries”).
Subject to tax and other considerations, it may be possible for the settlor and the trustee to be the same person. In some cases, a settlor or trustee might also be a beneficiary of the trust.
A trust can be created by an individual during his or her life (an “inter vivos trust”) or as a consequence of his or her death (a “testamentary trust”).
The terms of an inter vivos trust are usually set out in a document signed by the settlor. It will appoint a trustee or trustees and direct how assets are to be held, managed and distributed to or for the benefit of the beneficiaries. An inter vivos trust is created once the beneficiaries and the terms of the trust have been settled by the settlor and the trustee with sufficient certainty, and property has been transferred to the trustee to hold in accordance with the terms of the trust.
A testamentary trust, on the other hand, is created as a consequence of an individual’s death, usually pursuant to the Will of the individual or a beneficiary designation made in respect of an insurance policy, a registered retirement savings plan or a registered retirement income fund. A testamentary trust only comes into existence on the death of the individual who made the Will or beneficiary designation.
People create trusts for many reasons, including those set out below:
The trustee will control, administer and distribute the trust assets for the benefit of the beneficiaries in accordance with the terms of the trust and applicable law. Given the extensive powers of a trustee, it is important to choose someone who is trustworthy, but other factors should also be considered, such as:
The law imposes a number of responsibilities upon trustees, including the duty to:
Unless the Will or trust document provides otherwise, the compensation payable to a trustee will be determined in accordance with applicable law. A trustee who wishes to be paid compensation must obtain approval of the amounts claimed from the beneficiaries who have an interest in the matter. If approval is not forthcoming, a trustee may apply to the Court to have the compensation approved.
Sometimes a Will or trust document will specify a formula for the calculation of compensation. For example, it might direct that a lump sum be paid to the trustee annually, or that the trustee be paid for time spent based on a specified hourly rate.
Professional trustees, such as trust companies, may require that a fee agreement setting the terms of their compensation be signed and incorporated into the Will or trust document.
Compensation will be taxed in a trustee’s hands as income, and where the Will or trust document appoints more than one trustee, it will be shared between them. Sometimes it is shared equally. In other cases, particularly where one trustee assumes most of the work and responsibility associated with the trust, it may be divided on some other basis.
If you would like to consider the possibility of a trust as part of your estate plan or business structure, contact us. The lawyers in our private wealth, trusts and estates group would be pleased to talk with you about the opportunities relevant to your circumstances.
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