When Does a Trust Make Sense? You have minor children who should not receive a large inheritance outright at 18 You have a disabled beneficiary who needs to preserve government benefit eligibility You're in a blended family and want to protect your children's inheritance while providing for your spouse You're 65+ with a large estate in Ontario or BC and want to avoid probate fees You're a business owner wanting to income-split with family members You want to protect assets from a beneficiary's potential creditors or a future divorce Cost and Complexity of Trusts

Trusts in Canadian Estate Planning 2025

A trust is a legal arrangement where one person (the trustee) holds and manages assets for the benefit of another person or persons (the beneficiaries), according to the terms set by the person who created the trust (the settlor). In Canadian estate planning, trusts provide flexibility, asset protection, tax planning, and control over how wealth is distributed across generations.

How a Trust Works

Three parties are involved in any trust:

Settlor: The person who creates the trust and transfers assets into it
Trustee: The person or institution that manages the trust assets and makes distributions according to trust terms
Beneficiary: The person(s) who benefit from the trust assets or income

The same person can sometimes fill multiple roles (e.g., a parent can be both settlor and trustee), subject to legal limitations.

The Two Main Categories: Inter Vivos vs. Testamentary

Feature	Inter Vivos (Living) Trust	Testamentary Trust
When created	During settlor's lifetime	At death, through the will
When assets transfer	Immediately upon creation	After death, through estate administration
Tax rate	Top marginal rate (same as individual high-income)	Graduated rates for Qualified Disability Trusts and Graduated Rate Estates (first 36 months)
Probate	Assets avoid probate	Assets pass through estate first, then to trust
Common uses	Probate avoidance, creditor protection, incapacity planning	Minor children, disabled beneficiaries, blended families, spouses

Common Types of Trusts in Estate Planning

Spousal Trust

A testamentary trust that holds assets for a surviving spouse during their lifetime, with the remaining assets passing to other beneficiaries (often children) at the spouse's death. Used in blended families to provide income for the surviving spouse while ensuring assets ultimately pass to the testator's own children.

Alter Ego Trust

An inter vivos trust available to Canadians age 65+. The settlor transfers assets to the trust on a tax-deferred (rollover) basis. During the settlor's lifetime, they are the sole beneficiary. At death, assets pass to named beneficiaries outside the estate — avoiding probate. Popular for Ontario residents with large estates given the 1.5% probate fee.

Joint Partner Trust

Similar to an alter ego trust but for couples. Both spouses are beneficiaries during their lifetimes. Assets pass outside the estate at the second death. Available to couples age 65+.

Henson Trust

A discretionary trust for beneficiaries with disabilities, designed to preserve their eligibility for provincial disability benefits (like ODSP in Ontario). The trustee has full discretion over distributions — no beneficiary entitlement that could disqualify them from government assistance. See our dedicated Henson Trust guide.

Family Trust (Discretionary Trust)

An inter vivos trust with multiple family members as beneficiaries. The trustee has discretion to allocate income among beneficiaries — allowing income splitting to reduce overall family tax burden. Used extensively by business owners.

Testamentary Trust for Minor Children

Created through the will to hold assets for minor children until they reach a specified age (e.g., 25). The trustee manages and distributes funds for education, health, and welfare. Prevents children from receiving a large inheritance at 18 with no guidance.

Tax Treatment of Trusts in Canada

Trusts are generally taxed as individuals — but at the top marginal rate on all income retained in the trust. Key rules:

Inter vivos trusts: Taxed at the top marginal rate (~53% in Ontario) on income retained in the trust. Income distributed to beneficiaries is taxed in their hands — enabling income splitting.
Testamentary trusts: Generally also taxed at top marginal rate. Exception: Graduated Rate Estates (first 36 months) and Qualified Disability Trusts get graduated rates.
21-year deemed disposition rule: Trusts are deemed to dispose of all capital property every 21 years at FMV — triggering capital gains. Planning is required to minimize this impact.

21-year rule: This requires proactive planning. Trustees should consider distributing appreciated assets to beneficiaries (who inherit the ACB) before the 21-year anniversary to avoid triggering a large deemed gain inside the trust.

When Does a Trust Make Sense?

You have minor children who should not receive a large inheritance outright at 18
You have a disabled beneficiary who needs to preserve government benefit eligibility
You're in a blended family and want to protect your children's inheritance while providing for your spouse
You're 65+ with a large estate in Ontario or BC and want to avoid probate fees
You're a business owner wanting to income-split with family members
You want to protect assets from a beneficiary's potential creditors or a future divorce

Cost and Complexity of Trusts

Trusts require:

A trust deed or will provision drafted by a lawyer ($1,000–$5,000+)
Annual T3 trust tax returns filed by a CPA
Ongoing trustee administration (record-keeping, investment management, distributions)
Potential trustee fees if a professional trustee is used

The cost is justified for moderate to large estates — but for simple estates, the overhead may outweigh the benefits.

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