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If you were rich you'd roll a large portion of your wealth into a family trust for your children and grandchildren, saving hundreds of thousands on income taxes in the process.

You'd transfer the family compound on the lake into a trust as well, avoiding the inevitable disputes among your heirs over who pays the property taxes and insurance – and deferring what could be substantial capital gains taxes well beyond the time when you pass from this world.

In your will, you'd set up a spousal trust, leaving plenty of money for your partner for as long as they live without the headache of having to manage it or even file tax returns. The trustee would do that, just like you did during your lifetime. And when your partner passes on, the money that is left would go in trust to your favourite charity.

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Trusts are wonderful tools for the wealthy, but ordinary folks can use them, too. They can be worthwhile for amounts of money or assets of $150,000 – even less in some circumstances. The cost of setting up a simple testamentary trust – a trust set out in a will that takes effect when you die – can be an initial $2,000 to $3,000, mainly for legal fees.

The classic family trust is a form of living, or inter-vivos, trust, one that takes effect while you're still alive. A testamentary trust forms part of a will and so takes effect only after you are gone. Which one you choose depends on how willing and able you are to give up ownership of some of your assets now.

"If you have enough, you might be okay with giving it up today," says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. But if think you might need your savings, you'll take the prudent approach and pass on whatever is left in a will, she says.

Perhaps the simplest trust is one you set up during your lifetime for the education of your children or grandchildren. Often people will put enough money into a registered education savings plan to take advantage of the federal government grants, and then put money into a trust with the children as beneficiary.

An education trust is more flexible than an RESP, Ms. Marshall says. One of the children or grandchildren might decide to go to a technical school or theatre school that is not approved by the Canada Revenue Agency; an education trust will allow them to. The trust money can be used to pay for the child's living expenses or even to buy a car.

Given the large number of people in second or third marriages, spousal trusts are growing in popularity as a way to protect the interests of the children from a first marriage, experts say.

Often in a second marriage, a person will naturally want to provide for the new spouse but will worry about disinheriting children from a first marriage, says Keith Masterman, associate vice-president, trusts, at TD Waterhouse in Toronto. Rather than leaving everything to a second spouse, who may in turn leave it to his or her own family, Mr. Masterman advises clients set up a spousal trust as long as he or she lives. When the second spouse dies, the assets will go to the client's children from the first marriage.

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In this case, the choice of trustee becomes complicated, Mr. Masterman points out, because choosing either a child or the second spouse would put either in a conflict of interest. This can be resolved by hiring a professional trustee.

But trusts have other advantages.

For example, spousal trusts, like family trusts, can be used to split income, thereby lowering income taxes. By setting up a spousal trust, you are creating a second taxpayer because trusts are a separate legal entity. So, if you split your income with your spouse now, you can continue to do so after you are gone by setting up a trust and having the trust foot part of the tax bill.

You can spread your largesse around, using "sprinkler" trusts to split your income with your spouse, your children and their children, giving the trustee the discretion to allocate income from the trust however he or she sees fit – that is, to best tax advantage.









Naturally, the Canada Revenue Agency will scrutinize such arrangements closely, so the trust has to be set up properly, Ms. Marshall cautions. While parents retain control of the monies lent to the trust, "you have to look at whose money is generating the income." It must belong to the children.







Keep it private

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If privacy or probate is an issue, consider a trust.



When you die and your will is probated, your assets and your beneficiaries are on the public record. Anyone can see your will by paying a small fee. The details of a trust, in contrast, are confidential.



"Anyone" might include family members with an axe to grind or even charities hoping to approach your beneficiaries.



"Certain charities look at the affluent," says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. "They want to follow up with the beneficiaries looking for donations."



Another reason some people choose trusts is to avoid probate fees, which vary from province to province and are comparatively high in Ontario.



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