Common Misconceptions About Trusts for Minor Beneficiaries in Ontario

When it comes to estate planning in Ontario, a trust for minor beneficiaries is a powerful tool. But there are a lot of misconceptions out there about how these trusts work. In this article, we'll debunk some of the most common myths and give you a clear understanding of what you need to know to protect your children's future.

• What is a Trust?
• Why Use a Trust for Minors?
• Who Controls the Trust?
• When Does the Trust End?
• Tax Implications
• Alternatives to Trusts
• Cost and Complexity
• FAQs

What is a Trust?

Well, here's the thing - a trust is a legal arrangement where a person (the "trustee") holds and manages assets on behalf of one or more beneficiaries. In the context of estate planning for minor children, a trust is often used to ensure that any assets or inheritance left to the children are properly managed and distributed according to the wishes of the person creating the trust (the "settlor").

The key thing to understand is that a trust is a separate legal entity from the individual beneficiaries. This means the assets in the trust don't belong to the children directly, but are instead held and administered by the trustee for the children's benefit.

Why Use a Trust for Minors?

When it comes to leaving an inheritance or assets to minor children in Ontario, a trust can be an incredibly useful tool. The main reason is that minors under the age of 18 are legally incapable of managing their own financial affairs. So if you try to leave assets directly to a child, the court will have to appoint a guardian to manage that money until the child turns 18 - which can be a lengthy and expensive process.

By setting up a trust instead, you can name a trustee (often a family member, friend, or professional trust company) to manage the assets on the child's behalf. This gives you much more control over how the money is invested and distributed, and ensures it's used for the child's benefit rather than potentially mismanaged.

A trust also allows you to specify at what age the child will gain full access to the assets, rather than having to hand it all over at 18.

Who Controls the Trust?

When you create a trust for minor beneficiaries in Ontario, you (as the settlor) get to choose who will act as the trustee. This is the person or institution responsible for managing the trust assets and making decisions about how the money is invested and distributed.

Commonly, people will name a family member or friend as the trustee. But you can also choose a professional trust company or even co-trustees (e.g. a family member plus a trust company) to provide oversight and expertise.

It's important to carefully consider who you appoint as trustee, as they will have a lot of power and responsibility. The trustee must act in the best interests of the beneficiaries at all times and follow the terms you've laid out in the trust agreement.

When Does the Trust End?

One of the biggest misconceptions about trusts for minor beneficiaries is that the trust automatically ends when the child turns 18. In fact, you have a lot of flexibility in determining when the trust will terminate and the beneficiary will gain full access to the assets.

Many people choose to keep the trust in place until the child reaches a more mature age, like 21 or 25. This allows the trustee to continue managing the assets and ensuring the money is used wisely, rather than potentially being squandered by an 18-year-old.

You can also set up the trust to distribute the assets in stages, with the beneficiary gaining partial access at certain ages. For example, they might get 1/3 of the assets at 21, 1/3 at 25, and the final 1/3 at 30.

Tax Implications

Another common misconception is that trusts for minor beneficiaries are inherently complicated from a tax perspective. While there are some tax considerations to be aware of, a properly structured trust can actually provide significant tax advantages.

For example, income earned within the trust is generally taxed at the top marginal rate. But if that income is then distributed to the beneficiary, it is taxed in the beneficiary's hands at their lower personal tax rate. This can result in substantial tax savings over the long run.

Trusts can also be useful for minimizing probate fees, which can be quite high in Ontario. By holding assets in a trust, those assets may be able to bypass the probate process entirely, resulting in significant cost savings for your estate.

Alternatives to Trusts

While trusts are a powerful tool, they aren't the only option for leaving an inheritance to minor children in Ontario. Some alternatives to consider include:

• Outright gifts - Leaving assets directly to the child, which they'll gain full control of at age 18.
• Testamentary trusts - A trust that is created upon your death, as part of your will.
• Registered accounts - Designating a minor as the beneficiary of an RESP, RRSP, or other registered account.

Each of these options has its own pros and cons, so it's important to weigh them carefully with the help of an experienced estate planning lawyer. The right choice will depend on your specific goals and the needs of your family.

Cost and Complexity

One of the most common misconceptions about trusts for minor beneficiaries is that they are overly complex and expensive to set up. While it's true that trusts do involve more legal work than a simple will, the benefits they provide often outweigh the upfront costs.

Establishing a trust does require the guidance of an estate planning lawyer, which can add to the overall expense. But once the trust is in place, the ongoing administration is generally straightforward and the costs are manageable, especially when you consider the long-term advantages.

Additionally, the peace of mind that comes from knowing your children's inheritance will be properly protected and managed can be invaluable.

A well-crafted trust can provide financial security and stability for your family for years to come.

FAQs

Can I change the terms of the trust later on?

Yes, in most cases you can make changes to the trust agreement after it has been established. This might involve updating the trustee, modifying the distribution schedule, or altering other terms. However, the ability to make changes is not unlimited, so it's important to work closely with your lawyer to ensure the trust is structured properly from the outset.

What happens if the trustee mismanages the assets?

Trustees have a fiduciary duty to act in the best interests of the beneficiaries at all times. If a trustee breaches this duty through negligence, self-dealing, or other misconduct, the beneficiaries may be able to take legal action to remove the trustee and recover any lost assets. This is why it's so crucial to carefully select a trustee you truly trust to handle the responsibility.

Do I need to tell my children about the trust?

There's no legal requirement to inform minor beneficiaries about the existence of a trust set up for their benefit. Many parents choose to keep the trust confidential until the child reaches a certain age, to avoid potential issues. However, some level of transparency can also be beneficial, so it's worth discussing with your lawyer what approach may be best for your family's circumstances.

Can a trust be used to pass on more than just money?

Absolutely. Trusts can be used to hold and manage a wide range of assets, including real estate, investments, business interests, and even personal possessions. This allows you to create a comprehensive plan for transferring your entire estate to the next generation, not just the cash component.

What happens if the trust runs out of money?

One of the key roles of the trustee is to prudently invest and manage the trust assets to ensure they last for the benefit of the beneficiaries. However, if the trust is depleted, there are no more funds available to distribute. This underscores the importance of careful planning and working with experienced professionals when setting up a trust for minors.