TYPES OF TRUSTS

by katt Thu Oct 06, 2011 2:11 pm

Types of trusts

A trust is either a testamentary trust or an inter vivos trust. You need to know the type of trust, since different tax rules apply to different trusts.

Testamentary trust

A testamentary trust is a trust or estate that is generally created on the day a person dies. All testamentary trusts are personal trusts. The terms of the trust are established by the will or by court order in relation to the deceased individual’s estate under provincial or territorial law.

Generally, this type of trust does not include a trust created by a person other than a deceased individual, or a trust created after November 12, 1981, if any property was contributed to it other than by a deceased individual as a consequence of the individual’s death. Contact us for rules about testamentary trusts created before November 13, 1981.

If the assets are not distributed to the beneficiaries according to the terms of the will, the testamentary trust may become an inter vivos trust.

Under proposed changes, for tax years ending after December 20, 2002, a testamentary trust may become an inter vivos trust if the trust incurs a debt or other obligation to pay an amount to, or guaranteed by, a beneficiary. For this purpose, a beneficiary includes a person or partnership with whom any beneficiary of the trust does not deal at arm's length.

This does not apply for certain debts or other obligations, including ones:
incurred by the trust in satisfaction of a beneficiary's right to enforce payment of an amount payable by the trust to the beneficiary or to receive any part of the trust's capital;
owed to the beneficiary as a result of services provided by the beneficiary for the trust; or owed to the beneficiary as a result of a payment on behalf of the trust for which property was transferred to the beneficiary within 12 months of the payment and the beneficiary would have made the payment had they been dealing with the trust at arm's length.

http://www.cra-arc.gc.ca/tx/trsts/typs-eng.html