Planning for the future and making sure your assets are secure are important parts of estate planning. In Canada, two common ways to plan your estate are through wills and living trusts. This article explains the differences between wills and living trusts so you can decide which option is best for you.
- A living trust is a legal arrangement that helps manage and distribute assets during and after a person's lifetime.
- It’s possible to have both a living trust and a will in Canada, as they serve different purposes in estate planning.
- Living trusts offer advantages such as avoiding probate and efficiently transferring assets to others, like minor children.
- Setting up a living trust can be complex and more expensive than a will, but it depends on your unique situation.
- There are many types of assets that can be included in a living trust in Canada, including bank accounts, real estate, investments, and cryptocurrency.
What is a living trust?
A living trust, technically called an “inter vivos” trust, is a legal arrangement that helps you manage and distribute your assets while you’re alive, as well as after you pass away.
With a living trust, you (the grantor) can transfer ownership of your property and assets to the trust. The grantors are typically also named as the trustees for the trust.
It’s important to also name a successor trustee to manage the trust if you become incapacitated or pass away.
What's the difference between living trusts and wills?
Living trusts and wills are both important tools in estate planning. A will is a legal document that can outline your wishes for how you’d like your assets to be distributed after you die. In contrast, a living trust allows you to manage your assets during your lifetime as well as after you pass away.
Although it varies by province, wills typically go through the probate process, overseen by a probate court. Living trusts are more private and can avoid probate when you pass away.
Lastly, wills do more than leave instructions for distributing your assets and belongings. It's where you can appoint an executor, guardians for children, and even outline funeral and burial wishes. You cannot do these things with a trust.
The below table outlines the key differences between living trusts and wills.
Is a testamentary trust the same as a living trust?
No, a testamentary trust is not the same as a living trust.
A testamentary trust is established through a will and comes into effect after your death. It allows you to provide for minor children or individuals with special needs by managing and distributing assets based on your instructions.
In comparison, a living trust is created during your lifetime and allows for the ongoing management and distribution of assets.
Is it better to have a will or a trust in Canada?
Deciding between a will and a trust depends on your unique situation. While wills are commonly used and effective for many Canadians, living trusts offer some unique advantages.
What are the advantages of a living trust?
Living trusts provide several advantages in estate planning. They allow you to avoid probate, which can be a time-consuming and costly process.
With a living trust, the transfer of assets to beneficiaries can be more efficient and private. So your belongings can be given to the right people more easily and quickly.
Additionally, living trusts can be a good option if you have minor children, as you can outline instructions for their care and how they should be financially supported.
What are the disadvantages of a living trust?
There are some considerations to keep in mind if you are thinking about setting up a living trust.
First, the set up can be more complex and involve higher upfront costs compared to a will.
Additionally, transferring assets into the trust requires time and effort. It’s also important to know that not all assets can be included in a trust, so you may need to speak with a lawyer to understand these complexities.
Lastly, once assets are transferred into a trust, you no longer own them. That means that only the person you appoint as the beneficiary of the trust is entitled to the assets.
What if I want to cancel or revoke a trust in Canada?
Living trusts can be created as revocable or irrevocable. With a revocable trust, the person who created the trust is able to make changes to it over time. With an irrevocable trust, no changes can be made.
If you think you will need to make changes to the trust over time, or need to revoke it, a revocable trust may be a good option. However, this is an important decision, and you should speak with a lawyer who can walk you through all of the considerations before creating the trust.
Can I have both a trust and a will in Canada?
Yes, it is possible to have both a living trust and a will in Canada.
The living trust can be used to manage and distribute assets during your lifetime and can help you avoid the probate process for those assets held in the trust.
On the other hand, a will is essential for naming guardians for minor children, specifying funeral arrangements, and distributing assets that may not have been transferred to the living trust.
Having both a living trust and a will can make sure that your estate plan is complete and there are comprehensive instructions for the management and distribution of your assets.
Do I need a will if I’ve set up a living trust?
Yes! Even if you create a trust, it’s important to have a will. In fact, many people choose to have both as part of a comprehensive estate plan. A will includes much more than instructions for distributing your assets, it can include many of your other end-of-life wishes and helps to protect your loved ones.
How much does it cost to set up a trust in Canada?
The cost of setting up a trust in Canada varies depending on the complexity of the trust, the associated legal fees, and any other accounting or tax planning fees. While it may involve higher upfront costs compared to a will, it’s important to consider the long-term benefits and potential cost savings that a living trust can provide.
What are the steps needed to set up a trust in Canada?
Setting up a trust in Canada involves a few steps:
- Determine your estate planning goals and objectives. You might need to seek advice from an experienced estate planning lawyer who can guide you through the process and make sure you are compliant with all of the legal requirements.
- Next, draft the trust document, which includes specifying the trust's terms and beneficiaries.
- Transfer ownership of your assets into the trust and appoint a trustee or trustees to manage the trust.
- Regularly review and update the trust as needed.
What types of assets can I put in a living trust in Canada?
You can put a wide range of assets in a living trust, including the following:
- Bank accounts
- Real estate and property
- Insurance policies
- Investments, like stocks and bonds
- Tangible personal property, like furniture
- Limited liability companies (LLCs)
Some of these assets are more complex than others to include in a trust, and there are other types of assets that cannot be included in a trust in Canada. It’s best to speak with an estate planning lawyer if you plan to include these assets in a trust.
How do living trusts and wills work in real life?
Now that you know the similarities and differences between living trusts and wills, here’s a fictional scenario to help you better understand how these documents can work together in real life.
Karen and Mike set up a living trust and transfer their home and investment accounts into the trust. This means that the trust now owns the assets, not Karen and Mike.
They appoint their daughter Emily as the beneficiary of the trust. When Karen and Mike pass away, this means that the assets held by the trust are not covered by their will; rather they flow directly to Emily. This means that the assets aren't subject to probate; and they can also avoid the capital gains taxes that get triggered when someone passes away.
If Karen and Mike did not set up a living trust, and instead let those assets flow to Emily through their will, they would be subject to probate fees (1.5% in Ontario), and they may incur capital gains taxes, depending on the type of asset.
In addition to the trust, Karen and Mike also created wills, so their loved ones had clear instructions for how to distribute the remainder of their assets that weren’t covered by the trust. They were also able to appoint a guardian for Emily and outline other end-of-life wishes that were important to them.
The combination of a living trust and wills resulted in Karen and Mike having a comprehensive estate plan that protected their assets and their daughter, Emily.
Understanding the similarities and differences between wills and living trusts is important when creating an estate plan in Canada.
While wills are commonly used, living trusts offer advantages such as avoiding probate, providing for minor children, and efficient asset management. However, living trusts can be more complex and involve higher upfront costs. You may need to seek professional advice when creating a living trust, but you can create your legal will with Willful in just 20 minutes.