Here is a detail that can surprise people, including some professionals. Signing an inter vivos trust (i.e. one created during lifetime) does not by itself keep your Will and estate out of probate. A trust only controls the assets that are actually governed by it. If your home, accounts, or other property never properly formed part of the trust, or quietly slipped back out over the years, your family may face the exact court process the trust was designed to avoid. The good news is that checking is simple, while fixing gaps may be less so.
What requirements must be met to create a valid express trust?
The legal formalities include the three certainties of intention, subject, and object, as well as the fourth requirement of delivery. In addition, some types of assets require that the terms of the trust must be in writing. This mainly applies to real property and interests in real property.
What does this mean? Certainty of intention refers to the intention of the person who wants to create the trust – called the settlor. It must be clear that they intend a trust and not something else like a direct gift or a loan. There are no specific words that must be used, not even “trust”, and the intention can be inferred from conduct.
Certainty of subject refers to the property that is intended to be held in trust. It needs to be clearly identified such as a specific investment account or piece of real estate. Certainty of object refers to the beneficiaries for trusts created to benefit people, and charitable purposes for charitable trusts. Non-charitable purpose trusts are generally prohibited in jurisdictions such as Canada with a few exceptions.
The delivery requirement means that the subject property must be transferred to the trustees who will become the legal owners of the property. Part of the goal of delivery is to segregate the property from the settlor’s personal property and the other is to complete the change of legal ownership from the settlor to the trustee(s). The exception to the delivery and related change of legal ownership requirement is a self-declaration of trust.
What does a self-declaration of trust mean?
Unlike the typical situation where person A decides to settle a trust for the benefit of B and have C be the initial trustee, person A can declare the trust and appoint themselves as the initial trustee. In this case, A is already the legal owner of the property (e.g. investment account). As long as it is the whole of the account that is to form part of the trust property, there is nothing to deliver to the trustee since it is A. However, if A only wants to declare a trust with respect to a portion of the account, then that portion still needs to be separated out such as being placed in a new account.
What does “funding a trust” mean?
This refers to the process of ensuring assets that are to be held as part of the trust property (sometimes referred to as the trust fund) actually get there. The initial settlement of a trust typically involves a settlement item such as a $20 bill which is stapled to the trust deed permanently. Subject to the terms of the trust, additional property can be added by transferring the property to the trustees by whatever legal mechanism applies to the particular type of property. As part of this process, the trustees should be acknowledging and accepting the addition to the trust in writing so it is clear that the property is now subject to the trust fund and no longer part of the property of the transferor/settlor.
Think of the trust as a well-built container. It protects only what you place inside it. An unfunded or underfunded trust is a common estate planning problem, and families may discover it at the hardest possible moment.
How do assets end up outside a trust?
It is rarely the result of deliberate action and that’s the problem. Instead, it tends to be an oversight. Generally, it involves new property being acquired personally and not through the trust. It can be real estate, bank or investment accounts, art, jewelry, or shares of a privately held corporation. This lack of planning puts the property outside the trust structure and transferring it in later can have significant income tax implications. Depending on the nature of the trust, that may not be avoidable or will require considerable professional fees to overcome.
However assets fall outside the trust, the problem is the same: they are not where they were intended to be.
What happens to assets left out of the trust?
Assets held personally on death will form part of the estate of the owner and will be subject to the terms of the Will or laws of intestacy and may attract probate fees (also called estate administration tax). These assets may also be subject to Will and estate challenges that could have been prevented if they were held in a properly structured trust.
How do you check whether your trust is funded?
Pull the deed to real property and see whose name is on it. Look at the ownership line on your bank and investment statements. List anything of significance you have acquired since the trust was signed. If the name of the trustees are not on the asset, this suggests it is not part of the trust. However, this is not conclusive given that settlors cannot control real estate registry offices or financial institutions. If the trust deed clearly identifies the property and was properly executed by all of the trustees, this is sufficient without the administrative step of changing title.
For assets that were intended to be transferred later, if there is written documentation in the appropriate legal form for the type of asset, executed by the transferor and all of the trustees, this too may suffice.
Not having the trustees, and the name of the trust, listed as part of the ownership of the particular asset is not necessarily fatal but it can complicate matters as third parties dealing with the executors of the estate may question whether a particular asset is part of the estate and subject to probate or part of the trust. An estate planning lawyer can review existing trust structuring to assess the full picture and determine whether all is in order.
In conclusion
A trust you signed years ago may still be excellent. It simply needs to hold all of the property that was intended to be governed by the trust terms. If it has been more than a few years since anyone looked, a review could be a valuable checkup that avoids unnecessary future problems.
Not sure about your trust, we invite you to contact us at info@botsfordlawtep.com and schedule a consultation. These are exactly the situations we are here to help you navigate.
The above commentary is based on the laws of Ontario and those of Canada applicable therein. This blog post is not intended as legal or other professional advice. Please consult appropriate advisors before taking any action.
Plan well. Live well. Leave an organized estate.