What is the difference between a living trust and a testamentary trust?

A living (inter vivos) trust is created and funded during your lifetime; a testamentary trust is created by your will and takes effect on death. They are taxed differently and have different implications for probate.

What is a Henson trust?

A Henson trust is a discretionary trust designed to protect a beneficiary with a disability. Because the beneficiary has no fixed entitlement, the inheritance generally does not disqualify them from means-tested government disability benefits.

Can a trust help me avoid probate?

Assets held in a properly structured living trust are not part of your estate, so they pass outside the will and avoid probate on those assets. An alter ego or joint partner trust (age 65+) is often used for this purpose.

Do trusts protect assets from creditors?

A well-structured trust can offer meaningful asset protection, generally keeping trust assets beyond the reach of the settlor’s and beneficiaries’ creditors — though the protection depends on how and when the trust was set up.

Are trusts only for wealthy families?

No. While family trusts and freezes are common for business owners, testamentary and Henson trusts are widely used by ordinary families to provide for minor children or a relative with a disability.

Do trusts have to file their own tax returns?

Yes. Most trusts are separate taxpayers with their own filing obligations, and many face a deemed disposition of their assets every 21 years. This is one reason trusts should be set up and maintained with professional advice.

How are trusts used in estate planning in Canada?

A trust is a flexible tool that sits at the heart of many estate plans. In the words of Dale Barrett's “Holistic Tax and Estate Planning,” “a trust is a legal relationship wherein a settlor transfers assets to a trustee, who holds and manages these assets for the benefit of one or more beneficiaries.” That simple structure lets you control how and when people inherit, protect beneficiaries who cannot manage money themselves, and plan tax across a family. This article explains the main trust types used in Canada — general information, not legal advice.

What are the parts of a trust?

Every trust has three roles. The settlor creates the trust and transfers assets into it. The trustee holds and manages those assets, with a legal (fiduciary) duty to act prudently and in the beneficiaries’ best interests. The beneficiaries are the people or organizations entitled to benefit from the trust.

Trusts can be created during your lifetime (an inter vivos or living trust) or through your will, taking effect on death (a testamentary trust). The timing affects both tax treatment and whether the assets pass through probate.

Which trusts are used for tax and control?

Different trusts solve different problems. The book highlights several that recur in Canadian planning:

Family trust: used for income splitting and tax reduction, giving tailored control over how assets are distributed within a family
Spousal (or common-law partner) trust: lets the surviving spouse benefit during their lifetime, with the remainder passing to other beneficiaries — often children from a first marriage — afterward
Alter ego / joint partner trust: available at age 65+, lets you transfer assets without an immediate tax hit while keeping control, and helps avoid probate fees
Testamentary trust: created by your will, useful for controlling distributions to children or grandchildren over time
Bare trust: the trustee holds legal title only, with no real powers beyond transferring the property to the beneficiary on demand

How do trusts protect vulnerable beneficiaries?

One of the most important uses of a trust is protecting someone who cannot, or should not, receive a lump sum outright. A Henson trust is designed for a beneficiary with a disability: it protects their interest and assets “without compromising their eligibility for governmental assistance,” so an inheritance does not disqualify them from provincial disability benefits.

Trusts are also widely used to provide for minor children, to stage inheritances so a young adult does not receive everything at once, and to keep assets out of the hands of a beneficiary’s creditors or a divorcing spouse.

What other advantages do trusts offer?

Beyond control and protection, trusts can keep assets out of your estate (avoiding probate on those assets), provide a layer of asset protection, and — depending on the structure — defer or reduce tax. Assets in a properly structured trust are generally beyond the reach of the settlor’s and beneficiaries’ creditors.

Trusts are not free or simple, however. They have their own tax filing obligations and ongoing administration, and the rules (including the 21-year deemed disposition that applies to many trusts) are technical. The book treats trusts as a tool best deployed within a coordinated professional plan rather than a do-it-yourself fix.

This is general information, not legal or tax advice — set up and maintain any trust with professional guidance.

Frequently asked questions

What is the difference between a living trust and a testamentary trust?: A living (inter vivos) trust is created and funded during your lifetime; a testamentary trust is created by your will and takes effect on death. They are taxed differently and have different implications for probate.
What is a Henson trust?: A Henson trust is a discretionary trust designed to protect a beneficiary with a disability. Because the beneficiary has no fixed entitlement, the inheritance generally does not disqualify them from means-tested government disability benefits.
Can a trust help me avoid probate?: Assets held in a properly structured living trust are not part of your estate, so they pass outside the will and avoid probate on those assets. An alter ego or joint partner trust (age 65+) is often used for this purpose.
Do trusts protect assets from creditors?: A well-structured trust can offer meaningful asset protection, generally keeping trust assets beyond the reach of the settlor’s and beneficiaries’ creditors — though the protection depends on how and when the trust was set up.
Are trusts only for wealthy families?: No. While family trusts and freezes are common for business owners, testamentary and Henson trusts are widely used by ordinary families to provide for minor children or a relative with a disability.
Do trusts have to file their own tax returns?: Yes. Most trusts are separate taxpayers with their own filing obligations, and many face a deemed disposition of their assets every 21 years. This is one reason trusts should be set up and maintained with professional advice.