Updated: April 2025  |  bremo.io financial guides

Trusts in Canada — Types and When to Use Them

A trust is a legal relationship where one person (the "settlor" or "trustee") holds assets on behalf of another person or group (the "beneficiaries") according to specific terms. Trusts are powerful estate planning tools that can minimize taxes, protect assets, provide for dependants, and transfer wealth across generations in a controlled way. They are not just for the ultra-wealthy — many middle-income Canadians benefit from testamentary trusts for minor children or disabled beneficiaries.

The Basic Structure of a Trust

Every trust involves three roles:

• Settlor: The person who creates the trust and transfers assets into it
• Trustee: The person (or institution) that manages the trust assets according to the trust terms
• Beneficiary: The person or group who benefits from the trust assets

One person can hold multiple roles — you can be your own trustee in an inter vivos trust, for example. But in a testamentary trust (created by your will), you as the deceased cannot be the trustee.

Types of Trusts in Canadian Estate Planning

Testamentary Trusts

A testamentary trust is created by your will and only comes into existence on your death. It is the most common trust in Canadian estate planning. Common uses include:

• Holding assets for minor children until they reach a specified age (25, 30, etc.)
• Protecting a beneficiary's inheritance from creditors or family law claims
• Providing controlled income to a beneficiary who cannot manage money
• Qualifying for the Graduated Rate Estate (GRE) tax treatment

Graduated Rate Estate (GRE)

A qualifying testamentary estate is taxed at the same graduated rates as an individual (rather than the top marginal rate) for the first 36 months after death. This can provide significant tax savings if the estate has significant income during the administration period. After 36 months, the estate is taxed at the highest marginal rate.

Spousal or Common-Law Partner Trust

A testamentary spousal trust receives assets from your estate tax-free (using the spousal rollover) and provides income to your surviving spouse for their lifetime. On the spouse's death, the remaining trust capital passes to your designated beneficiaries (typically your children). This is the key tool for balancing spouse and children's interests in blended families and ensuring your estate ultimately goes to your own bloodline.

Inter Vivos Trusts

An inter vivos (or living) trust is created during your lifetime rather than by your will. Assets transferred into an inter vivos trust are not part of your estate at death and therefore bypass probate. Inter vivos trusts are taxed at the highest marginal rate (unlike GREs), so income splitting benefits are limited. Their primary estate planning uses are probate avoidance and asset protection.

Alter Ego Trust

Available to Canadians age 65 and over, an alter ego trust receives assets at cost (no deemed disposition, no capital gains at time of transfer) and holds them for your benefit during your lifetime. On your death, the assets transfer to the trust's remainder beneficiaries outside the estate, avoiding probate. You are the sole beneficiary during your lifetime, so there are no income-splitting benefits. The primary advantage is probate avoidance on large real estate and investment portfolios.

Joint Partner Trust

Similar to an alter ego trust, a joint partner trust is available to couples over 65. Both spouses are entitled to the trust income during their lifetimes, and assets pass to remainder beneficiaries outside the estate on the second death. Like alter ego trusts, these avoid both probate and the immediate capital gains tax on transfer.

Henson Trust (Disability Trust)

A Henson trust is a discretionary trust designed to provide for beneficiaries with disabilities without disqualifying them from means-tested government benefits like ODSP. The key feature is that the trustee has absolute discretion over distributions — the beneficiary has no legal entitlement to the trust assets, so the assets are generally not counted as the beneficiary's own. Henson trusts can hold assets indefinitely without the 21-year deemed disposition rule applying.

Family Trust

A family trust (discretionary trust) is typically used in business and tax planning to hold company shares and distribute income among family members at lower marginal rates. The trustee has discretion over who receives distributions from the trust in any given year, allowing income to be allocated to family members in lower tax brackets.

Administrative Requirements of Trusts

Trusts are not simple to administer. They require:

• Annual T3 trust income tax returns
• A trust account number from CRA
• Detailed record-keeping of all transactions
• Proper accounting and reporting to beneficiaries

Many estate trustees work with an accountant who specializes in trust taxation. For significant trusts, a professional trust company may serve as trustee.

When Is a Trust Worth the Complexity?

Trusts add legal and administrative complexity and cost. They are worth considering when:

• You have minor children who cannot receive assets directly
• You have a beneficiary with a disability who needs income without losing government benefits
• You are in a blended family and need to protect children's inheritance from a surviving spouse's future decisions
• Your estate is large enough that probate fees and tax savings outweigh administrative costs
• You want to control how and when beneficiaries receive their inheritance