Trusts: Uncomplicating the Complex - Preserving Wealth and Relationships

Written by Paul Coleman and Russel Baskin

Families rarely struggle with the idea of having wealth. They struggle with unclear expectations, unspoken assumptions, and structures no one understands. Trusts were created to reduce that uncertainty, but when introduced without transparent communication and thoughtful guidance and governance, they can create as much tension as they resolve. 

At its simplest, a trust is a rulebook wrapped around a collection of assets. You define the rules, a trustee carries them out, and the beneficiaries receive support according to those terms. But in a family context, a trust is more than a legal tool. It is a message. How you explain it, how you choose trustees, and how you communicate its purpose will shape whether it becomes a source of stability or a source of conflict. 

This article outlines both the technical fundamentals of trusts and the relational considerations essential to inserting a trust into a family of wealth. 

What a Trust Is and Why Families Use Them

A trust is a legal relationship in which one party holds and manages assets for the benefit of others. In Canada, trusts are not separate legal persons, but they are treated as taxpayers under the Income Tax Act. They file tax returns, report income, and face specific tax rules. 

Families typically use trusts to protect assets, provide structured financial support, reduce conflict, maintain privacy, and organize succession planning. Trusts also allow families to place conditions around the use of wealth, helping younger or vulnerable family members receive support without prematurely gaining ownership or control over significant assets. However, if these intentions are not communicated, beneficiaries may assume the trust exists because they are not trusted, leading to resentment or misunderstanding. 

The Three Key People in Any Trust and the Human Factors Behind Them

Timing mismatch: 

1. The Settlor

The settlor transfers assets into the trust and defines its purpose. A well-written trust begins with clarity from the settlor, not only legally, but relationally. Settlor’s silence about intent is one of the most common sources of family conflict decades later. 

2. The Trustees

The trustees have fiduciary duties and must follow the trust terms meticulously, avoid conflicts of interest, maintain proper records, and manage investments responsibly. Families sometimes choose a professional or corporate trustee to provide consistency, expertise, and neutrality, especially when family dynamics are complex or assets are sophisticated. Corporate trustees also provide continuity and professional administration.  

Selecting a trustee is not only a technical decision. Choosing the right person requires careful thought about the relational impact, not just their administrative competence. When one sibling is appointed as trustee, it can create a sense of imbalance or authority that strains family relationships. Spousal trustees may face their own challenges, as loyalties can become divided between the role of partner and the responsibility to the trust. Problems can also occur when there is little clarity or communication about what trustee discretion truly entails, leaving beneficiaries unsure of how decisions are being made. This can cause beneficiaries to feel excluded or treated as if they are incapable of understanding important matters. 

Good trustee selection is as much an interpersonal decision as a technical one. 

3. The Beneficiaries

The beneficiaries are those individuals or organizations who benefit from the capital held within the trust and income generated by it or other support depending on the trust document. Their rights depend on whether the trust is discretionary or subject to terms pursuant to the document giving rise to the trust.  

From a relational standpoint beneficiaries may sometimes interpret decisions made by the trustee as personal judgments about their choices or character, which can create unnecessary strain. When those decisions are not clearly explained, beneficiaries can develop a sense of entitlement, become overly dependent on trust distributions, or grow suspicious about how and why choices are being made. If distributions are unequal, the absence of context can heighten or even create tension among siblings, as each person may draw their own conclusions about fairness and equality without understanding the reasoning behind the trustee’s actions. 

What Can Go into a Trust

A trust can hold a wide variety of investments, including but not limited to real estate, private company or publicly traded shares, and other financial property. The document giving rise to the trust defines how and when these assets are accessed. Canadian families often integrate trusts into their estate plans to reduce probate exposure, protect family cottages or businesses, and manage wealth across generations.  

Canadian Tax Rules Every Family Should Understand

The 21 Year Deemed Disposition Rule

In Canada, most trusts face a deemed disposition of their capital property on the 21st anniversary of the settlement of the trust and every 21 years thereafter. This means the trust is treated as having sold and repurchased assets at market value, with capital gains tax payable notwithstanding the fact that no actual sales have occurred. Families must plan well ahead of this date to avoid unnecessary tax exposure. 

Some trusts, such as alter ego trusts, spousal trusts, or joint partner trusts, have different rules. Their first deemed disposition occurs at the death of the settlor or surviving spouse. 

New Trust Reporting Requirements

Beginning with taxation years ending on or after December 31, 2023, an increased scope of trusts must file annual tax returns and must disclose detailed beneficial ownership information. Even previously inactive or simple trusts may be required to file. Bare trusts were granted temporary administrative relief for the 2023 and 2024 tax years, but this relief is not permanent. 

Probate Considerations

Assets held in an inter vivos trust generally do not pass through probate. In Ontario, the Estate Administration Tax is zero on the first $50,000 of estate value and is 1.5 percent above that. A trust can reduce probate exposure but does not eliminate income taxes arising from death or ongoing trust activity.

Special Needs Planning: The Henson Trust

A Henson trust is a fully discretionary trust used to protect the eligibility of a beneficiary receiving Ontario Disability Support Program (ODSP) benefits. The trustee maintains absolute discretion, which ensures that the trust assets are not treated as the beneficiary’s own property for ODSP purposes. Families must follow ODSP rules carefully to maintain eligibility. 

The Most Common Types of Trusts

Inter Vivos Discretionary Family Trust

Created between living persons. This type of trust offers flexibility and is widely used for business succession, asset protection, and structuring family support. Inter vivos trusts are subject to the 21-year rule described above. 

Alter Ego or Joint Partner Trust

Available to individuals age 65 or older, these trusts allow tax-deferred rollovers, reduce probate exposure, and create certainty in estate planning. The first deemed disposition occurs at death, not after 21 years.

Testamentary Trust

Created through a will and activated at death, testamentary trusts are often used to provide for spouses, children, grandchildren, or vulnerable beneficiaries in a structured manner. Testamentary trusts can offer protection and governance beyond the settlor’s lifetime.

Charitable Remainder Trust

Charitable remainder trusts are a specialized tool that provide income to the donor or another beneficiary during their lifetime, with the remainder ultimately passing to charity. These require precise valuations to generate appropriate donation tax credits in Canada. 

Each trust provides different tax and governance benefits, but each also carries different relational implications depending on timing, control, and transparency. 

How Trust Distributions Are Decided

Decisions with respect to trust distributions are generally determined based on the following factors.

Purpose

Distributions must align with the purpose of the trust. Examples may include distributions to provide support for education, health, business startup, housing, or other needs that match the trust’s objectives.

Timing

Payments may be made as needed, annually, on specific milestones, or in stages depending on the trust terms.

Amount

The trustee may follow budgets, caps, matching formulas, or staged support frameworks as defined in the trust document. The goal is consistency and fairness based on the trust’s intent. 

But the greatest determinant of trust harmony is how these decisions are communicated. If trust distributions are decided solely on the technical and legal requirements, tensions can arise in the family when beneficiaries later learn about important rules or limitations after the fact. Early education for the family and ensuring there is a clear shared understanding about the purpose of the trust and how distribution decisions are intended will go a long way to maintaining family harmony. 

Integrating Trusts into Family Governance

Trusts work best when integrated into a broader governance framework that may include: 

• Scheduled trustee reports 

• Family meetings or education sessions 

• Clear communication expectations 

• Written investment and distribution guidelines 

• Agreed-upon protocols for raising concerns 

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Families that incorporate the trust into their governance framework reduce misunderstandings, maintain transparency, and build confidence across generations. A trust introduced without context feels like a control mechanism. A trust introduced with communication feels like a support system. 

Final Thought: Trusts Are Technical and Families Are Human

Trusts can simplify complexity, but they also introduce new dynamics. When families pair strong technical design with thoughtful communication, they create trusts that protect not only assets, but relationships.  

FAQs 

1. Why are trusts such a central element in family estate planning? They are a cornerstone of family estate planning, as they help to protect assets, avoid probate, and maintain control over how and when wealth is distributed—while preserving privacy. They can also enhance tax efficiency and support the thoughtful transfer of wealth across generations. 

2. How are trust decisions made? Trustees make decisions based on the purpose and rules of the trust. Clear communication is essential to ensure beneficiaries understand how and why decisions are made. 

3. What is the biggest risk with trusts? The greatest risks are often relational, not technical. Without clear communication and shared understanding, trusts can create confusion or conflict within families.  Written by Paul Coleman and Russel Baskin