Should I put my house in a trust? – Money sense

What is a trust?

A trust is a legal arrangement in which an individual, called the settlor, transfers assets to a trustee to manage them for the beneficiaries, based on predetermined rules. The assets are usually investments, real estate or a business.

There are two main types of trusts: an “inter vivos” (living) trust, created while the settler is still alive, and a “testamentary” trust, which is written into a will and takes effect after death.

Related reading: The difference between wills and living trusts

Use of a trust

Trusts may have an income tax motive, an estate planning benefit, or a practical use to hold assets for a vulnerable beneficiary. This vulnerability may be that the beneficiary is too young, such as a minor child, or is unable to manage the assets themselves, such as someone with an intellectual disability or another disability. Trusts are also sometimes used to maintain privacy.

The most common trust application never comes to fruition. People with minor children usually have wills that include testamentary trusts if they die before their children reach adulthood. But since most parents don’t die while their children are young, these trusts are never funded.

Another common use is for business owners who may one day sell their business. A trust can own shares of their company with family members, including minor children, as beneficiaries. This way, when the trust sells shares of the company in the future, it can allocate the capital gain to multiple people. If the shares qualify for the lifetime capital gains exemption, a trust can multiply the available exemptions instead of having a capital gain taxable only to the business owner.

Main residence exemption

Speaking of capital gains, in the context of your question, Silvana, it’s important to think about what happens to your primary residence when you die.

The primary residence exemption (PRE) allows a taxpayer to claim a tax-free sale on an eligible home. You must have usually lived there in the years in which you want to claim the exemption. You can only designate one home as your main residence per year. However, it can apply to houses, apartments, cottages and similar holiday homes, so it doesn’t necessarily have to be the house you mainly live in, nor does it have to be the property where your mail goes.

When someone dies, he is expected to sell his possessions. One exception is if they leave assets to their spouse or partner. In that case, depending on the assets, they can generally transfer tax-free or tax-deferred.

So if you don’t have a spouse or civil partnership, your executor can claim the principal residence exemption for your home upon your death, so no tax will arise, assuming the home qualifies.

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As such, a trust is unlikely to save you income tax on your primary residence, Silvana.

Probate by province

However, a trust can save you estate or inheritance taxes. This varies per province or territory. These fees are payable to probate a will and allow the executor to distribute assets to beneficiaries.

The lowest probate costs are found in Manitoba and Québec, where most estates do not have probate fees. Alberta also has relatively low fees, with a flat cap of just $525 for estates over $250,000.

Ontario charges $14,250 for a $1 million estate (1.5% on the value over $50,000). For a $1 million estate in British Columbia, this would be $13,450 (1.4% on amounts over $50,000, plus a small fee on the first $50,000).

The wide range of benefits means that where you live can have a significant impact on the cost of settling an estate subject to probate. Residents of jurisdictions with high fees may be more motivated to reduce estate taxes.

What should you do?

A trust doesn’t die if you do that. So a trust can be written to distribute assets, such as your home, when you die. This is not part of your estate and therefore avoids probate.

In your case, Silvana, my concern is that you may only be trying to save $15,000 on a $1 million estate, depending on where you live. The legal costs of setting up a trust can be $5,000 or more, and the ongoing accounting costs of filing a T3 Trust and Information Return and preparing annual trust minutes can be $1,000 to $2,000 per year, so the costs can easily overshadow the potential savings.

Trusts have a place, but there may not be a compelling reason to consider one as your primary residence unless the value is quite significant and you live in a province or territory with high probate. Personal advice is important when there are complex tax and wealth matters.