Do I Need a Trust?

Trusts in Two Systems: Living Trusts in the US, Will Trusts in Canada

A trust is simply a legal arrangement in which a trustee holds and manages assets for the benefit of someone else under rules you set. Where trusts are used — and why — differs sharply between the United States and Canada. In the US, the revocable living trust is a mainstream planning tool: you transfer assets into a trust during your lifetime, keep full control as your own trustee, and on death the assets pass to your beneficiaries without going through probate. Because probate in some states is slow, expensive, and public, avoiding it is a genuine benefit, and the revocable living trust is tax-neutral while you live — you still report its income on your personal return, and it becomes irrevocable only at death.

In Canada the picture is different. The workhorse is the testamentary trust — a trust created inside your will that springs into existence on death — used to hold a minor's or a disabled beneficiary's inheritance, or to provide for a spouse. Inter vivos (living) trusts do exist and can avoid provincial probate fees, but since 1999 most are taxed at the top marginal rate and are created by a deemed disposition that can trigger capital gains, so they are used more selectively. Alter-ego and joint-partner trusts, available from age 65, are notable exceptions that allow a tax-deferred transfer and probate avoidance. The right structure depends entirely on your country, province or state, and goals.

Protecting Vulnerable Beneficiaries: Henson and Special Needs Trusts

The most compelling reason to use a trust is to protect a beneficiary who cannot safely receive money outright. For a beneficiary with a disability who relies on means-tested government support, an outright inheritance can be catastrophic: it can push their assets over the program's limit and cut off the benefits they depend on. In Canada, the answer is the Henson trust — a fully discretionary trust in which the trustee, not the beneficiary, decides every payment, so the trust assets are not counted as the beneficiary's own and provincial disability benefits (such as ODSP in Ontario) are preserved. In the United States, the equivalent is a special needs (or supplemental needs) trust; a third-party special needs trust funded by your estate is preferable to a self-settled one because it avoids the Medicaid payback rule.

Minors and beneficiaries who struggle with money need protection too. A minor cannot receive an inheritance directly, so without a trust the funds sit under court supervision and are released as a lump sum at the age of majority — often 18 or 19. A minor's trust lets you appoint a trustee and release capital in stages at ages you choose. A spendthrift trust similarly shields an inheritance from a beneficiary's creditors and their own poor decisions by letting the trustee control distributions. In each case, the trust converts a risky lump sum into managed, purpose-driven support.

Probate, Privacy, Tax, and Whether a Trust Is Worth It

Beyond protection, trusts deliver three practical benefits: avoiding probate, preserving privacy, and controlling timing. Assets in a trust generally pass outside the probate process, which in the US can save months and meaningful fees, and in Canada can reduce provincial probate fees or estate administration tax on the value that would otherwise flow through the estate. Because probate is a public court process, keeping assets in a trust also keeps your affairs private — a real consideration for business owners and anyone who values confidentiality. And a trust lets you dictate not just who inherits but when and on what conditions, something an outright gift cannot do.

It is equally important to know when a trust is not worth it. On the tax side, Canada has no estate or inheritance tax — death instead triggers a deemed-disposition capital gains tax that trusts do not eliminate — while in the United States the overwhelming majority of estates owe no federal estate tax at all because their value falls under the federal exemption, which sits in the multi-million-dollar range per person; a few states impose their own estate or inheritance tax. For a family with capable adult beneficiaries, a simple estate, and inexpensive local probate, a clear will with coordinated beneficiary designations may accomplish everything a trust would at a fraction of the cost. The point of this tool is to match the structure to your actual situation rather than default to the most complex option.

Related: Wills & Estates Wizards · All Wills & Estates Wizards · Will Drafting Readiness Assessment · What Happens If I Die Without a Will? · Guardianship Designation Planner · All Legal Wizards