Article hero image

Trusts: They're Even For People Who Don't Have a Yacht

Wealthsimple makes powerful financial tools to help you grow and manage your money. Learn more

Your first question about trusts is possibly a simple one: Who cares? Aren’t trusts just for people with yachts, or wealthy grandparents who live at Downton Abbey, or, more specifically, those of us who will leave, or inherit, a vast and massively valuable estate?

The answer is, first of all, yes, trusts can be very useful if you’re wealthy. But they can also be useful to people who aren’t insanely rich. Because there are lots of kinds of trusts, and they’re used for lots of different reasons.

So let’s dig into it. What are trusts? Who are they for? And how can I make one useful if I don’t own a fleet of private jets? We spoke to Melanie Yach, a Toronto estate attorney, to discover the answers to all these questions — and we even cut out all the boring parts.

Get the best stories from our magazine every month

Sign up for our email newsletter

What, exactly, is a trust? A trust is a mechanism for passing assets from one party to another. That asset can be a home. It can be cash. It can be a portfolio managed by your favourite algorithm-based online investment company that uses a powerful combination of technology and humans to build perfect investment portfolios to help you reach your goals and rhymes with Shmelthshmimple. (You can set one up with us here.)

There’s some terminology to understand. For instance, there are three parties to every trust:

  1. Grantor. This is the person with the assets. He or she creates the rules for the trust — how much of the income, appreciation, or principal is paid out and how often.

  2. Trustee. The person who administers the trust portfolio according to the rules lain out by the grantor. The grantor can, and often does, name him- or herself trustee. Otherwise the trustee can be a relative, business associate or another trusted party.

  3. Beneficiary. The person who receives the assets.

Why would you get one? First, it helps the relatively wealthy save money. Many people put their assets in trusts to save money on taxes in the short-term. Once you put assets into a trust — depending on what kind of trust it is — they don’t technically belong to you any more. They belong to the trust. So you will not be taxed on any income they generate — interest, dividends, etc. Depending on whether your investments generate a lot of income, that can save some real money.

This can also save you money because of a difference in income tax rates. If you're in a high tax bracket, and you have a child in a low tax bracket, putting income-producing assets in a trust distributed to that child effectively reduces your tax rate. This process is sometimes called income splitting. The trust pays no income tax because it distributed the money; you are not taxed on the assets because you put them in the trust; and your child is taxed at their lower rate instead of yours.

They’re also really valuable if the beneficiary isn’t necessarily able to handle managing their own money. Trusts are often used as a way to designate how your beneficiaries spend their inheritance. This isn’t necessarily because the grantor is a control freak even from beyond the grave, although sometimes that is the case. But it’s more often the case that the beneficiary may not be equipped to handle that money for one reason or another.

Here are a few examples of situations when trusts are useful:

  • If you’re leaving money or other assets to a minor.

  • If a child, or other beneficiary, has a drug problem, a trust can ensure that they have enough money for treatment and other basic needs, but that that money can’t be spent on other things.

  • If a child, or other beneficiary, has a mental illness, a trust can ensure that person is provided for, and can even provide a trustee who can help administer the account.

  • If you want to give your kids the chance to make mistakes. For instance, your kid could get 1/3 of the money at 30, 1/3 at 35, and 1/3 at 40. If they’re foolish with the first couple installments — or invest in individual stocks instead of smart portfolios — there will still be more coming.

  • If the beneficiary has a disability. When it comes to a child, for instance, who receives government assistance, his or her qualification is based on the worth of his or her assets. If you have a child with Down syndrome and you gave him or her all of your money, he or she may not qualify for that assistance any more. But if your trust stipulated that the money be released at the discretion of the trustee to ensure your beneficiary’s quality of life, that beneficiary would still qualify for government assistance.

Recommended for you

  • Why the Asset Bubble Popped, All at Once

    Finance for Humans

  • Why Most Eco-Friendly Investment Funds Really Aren’t That Eco-Friendly

    Finance for Humans

  • Is it Better to Pay Down Your Mortgage or Invest?

    Finance for Humans

  • Canadians Say They Need $1.7M to Retire. We Calculated How to Get There

    Finance for Humans

Trusts are also often used after the dissolution of a marriage. Trusts can be useful, Yach says, in separation agreements. Say you and your spouse have children and you split up. Say you then get a life insurance policy. If you set up a trust, then if you die your policy is paid to your ex, but he or she has to use the money for the benefit of the kids. And in the unfortunate event that the child passes away, that money doesn't go to your ex-spouse; it's returned to your estate to be distributed according to whatever instructions you left behind.

Are there different kinds of trusts? Like anything complicated and financial, there are lots of versions of trusts. But one distinction you should know about is between testamentary and inter vivos (living) trusts. Testamentary trusts only apply when you're dead. They are ways of passing your assets on to your heirs. All other trusts are living trusts. No surprise, they're called that because you are still living.

Another important pairing to know is revocable trusts and irrevocable trusts. What does that mean, you ask? And should I get an irrevocable trust because it sounds cooler? Well, maybe.

An irrevocable trust cannot be changed once it’s established. You form the trust, and poof: That’s it. A revocable trust, on the other hand, can be amended. After you establish the trust, and decide who you’re trusting and with how much, you can change your mind. You might say it’s a trust for people with trust issues.

When would you use a revocable trust? Say you're a wealthy person who divorced and never wants to remarry. But you've been dating someone for a long time. You're practically married, and you want to leave that person some money. With a revocable trust, you could leave him or her as much as you want — and you could change it whenever you want, depending on your mood and how annoying he or she has been lately.

Note: There are other reasons to form a revocable trust. Like if you want to include grandkids who aren’t yet born, etc.


Wealthsimple is a new kind of financial company

Invest, trade, save, spend, and even do your taxes in a better, simpler way.

inline cta

So why wouldn’t you want to have a revocable trust? Isn’t it better to have the option of changing your mind? There’s a very simple reason. In the eyes of the government, all the assets in a revocable trust are part still of the grantor’s estate. You’ll still be taxed on the income generated by your assets.

However, there’s a trick for people who want the flexibility of a revocable trust but some of the tax benefits of an irrevocable one. You can include a clause that converts the trusts from revocable to irrevocable upon the grantor’s death so you avoid estate tax.

Why not get a trust and skip the will, then? One of the reasons to think twice is cost. While there are some drawbacks — your money can get stuck in court before being distributed to your heirs, for instance — wills are standard legal practice. They’re fairly inexpensive. Trusts, on the other hand, can be complicated and can end up costing you thousands of dollars in legal bills to establish, and in annual compliance fees.

One more benefit of trusts: You can put the assets that are part of your trust into a smart portfolio at Wealthsimple. It’s easy. After establishing the rules of the trust with your attorney, create a new portfolio with Wealthsimple. Fill out the same questionnaire that you did to create your other Wealthsimple investment portfolios, and you’re done. Just let our technology, and the know-how of our financial team, grow your money, tax free.

Wealthsimple uses technology and smart, friendly humans to help you grow and manage your money. Invest, save, trade, and even do your taxes in a better, simpler way.

Money Diaries


Margaret Atwood


Get the best stories from our magazine every month

Sign up for our email newsletter

  • Finance for Humans

    Our Four Step Plan to Investing in a Crappy Market

    And oh, it’s been crappy. It's easy to feel like an investing genius when the markets are going up. But how do you stay smart when markets are... not up?

  • Finance for Humans

    Nine Ways to Be Smart When the Market Goes Down

    Smart investors don’t try to avoid downturns, which are inevitable. Instead, they make sure they’re in a good place when the markets go back up. Because that’s inevitable, too.


    A new kind of financial company

    Invest, trade, save, spend, and even do your taxes in a better, simpler way.

    see-more cta
  • Finance for Humans

    Five Gloriously Silly Things To Do With Your Tax Refund

    Getting a giant refund? Don’t want to be smart and invest it but short on ideas for what to do with it? We’re here to help.

  • Finance for Humans

    Learn to Speak Crypto: Lesson Three

    In our third installment, we’ll learn about the possibility of a whole new (and some say much better) internet, and how to watch out for a common scam.


A new kind of financial company

Invest, trade, save, spend, and even do your taxes in a better, simpler way.

GET STARTEDright arrow icon

Our best stories, once a month.

Sign up for our newsletter

The content on this site is produced by Wealthsimple Technologies Inc. and is for informational purposes only. The content is not intended to be investment advice or any other kind of professional advice. Before taking any action based on this content you should consult a professional. We do not endorse any third parties referenced on this site. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only. By using this website, you accept our (Terms of Use) and (Privacy Policy). Copyright 2023 Wealthsimple Technologies Inc.