TRUST INSTRUMENT - The Legal Agreement establishing the Trust
To schedule an appointment, contact our law firm at 403-400-4092 or Chris@NeufeldLegal.com
A trust instrument (trust agreement, trust deed) is the legal document that establishes a trust. It is the foundational document that outlines the rules, terms, and conditions under which a person's assets will be held, managed, and eventually distributed to their beneficiaries.
A trust instrument is designed to establish and define the core functions, roles and provisions of the trust, including:
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Settlor (or Grantor/Trustor): The person who creates the trust and contributes the property to it [more on the settlor].
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Trustee: The individual or entity (like a bank or trust company) legally bound to hold title to the trust property and manage it according to the instructions in the trust instrument. They have a fiduciary duty to act in the beneficiaries' best interest [more on trustees].
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Beneficiaries: The person or people who will receive the assets or benefit from the income generated by the trust property [more on beneficiaries].
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Trust Property (or Corpus/Assets): The assets that are transferred into the trust (e.g., real estate, cash, stocks, jewelry).
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Terms and Conditions: The detailed instructions from the Settlor dictating:
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How the assets should be managed and invested.
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When, how, and to whom distributions should be made (e.g., lump sum, scheduled payments, or upon reaching a certain age).
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The powers and responsibilities of the Trustee.
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Because trust laws vary by jurisdiction, a trust instrument must comply with the specific provincial legal formalities to be valid, in addition to being in conformity with applicable tax legislation, such that these legal complexities are best dealt with an experienced estate planning lawyer. Some of the distinctive aspects that may be addressed in a trust instrument include:
A. The 21-Year Deemed Disposition Rule Clause
This is a distinctly Canadian tax-driven clause that addresses the 21-Year Deemed Disposition Rule under the Income Tax Act (Canada). This rule deems a trust (specifically, certain types of non-spousal or non-alter ego trusts) to have sold its capital property at fair market value every 21 years, triggering a capital gains tax liability. As such, the trust instrument will often grant the trustees specific powers to mitigate this tax event, such as:
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Wind-up or Distribution Power: Explicit power to distribute trust capital to beneficiaries before the 21-year anniversary to avoid or defer the deemed disposition tax.
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Postponement of Vesting Day: While the rule itself cannot be avoided, the clause often guides the trustees' actions in response to it.
B. Henson Trust or Absolute Discretionary Trust Clause
This provision is critical for beneficiaries who rely on government support for a disability. The clause that gives the trustee absolute, unfettered discretion to pay or not pay any capital or income to the disabled beneficiary. Crucially, the beneficiary must not have any legal right to demand funds from the trust. This structure, often referred to as a Henson Trust, is designed to ensure that the assets held in the trust for a disabled beneficiary are not considered an asset owned by the beneficiary for the purpose of qualifying for provincial disability benefits. If the beneficiary had a right to the funds, they could be disqualified from receiving essential government support.
C. Alter Ego Trust or Joint Partner Trust Clauses
These are specific types of inter vivos (living) trusts created in Canada primarily for estate and tax planning for seniors. The trust instrument will explicitly state that the trust is an Alter Ego Trust or Joint Partner Trust by including the necessary qualifying conditions from the Income Tax Act (Canada):
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The settlor (and/or their spouse) must be age 65 or older.
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The settlor (and/or their spouse) must be the only one(s) entitled to receive all the income of the trust during their lifetime.
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The settlor (and/or their spouse) must be the only one(s) who can receive or use any of the capital during their lifetime.
These trusts allow the transfer of assets to the trust without triggering an immediate capital gain (a "rollover") and permit the assets to avoid probate upon the settlor's death.
D. Bare Trust Declaration Clause (Mandatory Reporting)
This has become more critical due to recent Canadian tax reporting changes. For a Bare Trust (where the trustee simply holds legal title and must follow the beneficiary's instructions), the instrument may explicitly document the agency relationship. While not a "trust" in the traditional sense, this type of arrangement is now subject to expanded annual T3 tax reporting requirements in Canada, which mandate the disclosure of information about the settlor, trustees, and beneficiaries. The trust document itself serves as the formal declaration of this arrangement to satisfy legal and reporting requirements.
As such, when you are looking to create a trust that legally facilitates your objective goals, contact our law firm today to schedule a confidential consultation at 403-400-4092 or via email at Chris@NeufeldLegal.com.
IMPORTANT NOTE: This website is designed for general informational purposes. The site is not designed to answer specific questions about your individual situation or entitlement. Do not rely upon the information provided on this website as legal advice in respect of your individual situation nor use it as substitute for individual legal advice. If you want specific legal advice, you need to engage a lawyer under established legal engagement procedures that have been specifically agreed to by that lawyer.
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