What is a Trust Fund? The Secret Wealth Tool Unveiled

What is a Trust Fund in Canada?

In Canada, a trust fund simply holds assets for someone’s benefit. Legally, when you hear “trust fund” it means there’s a settlor (person who creates the trust by putting in assets), a trustee (the manager), and a beneficiary (who eventually gets the assets).

For example, if Grandma Alice puts $50,000 into a trust for her grandchild, she’s the settlor, the bank or a lawyer could be the trustee, and the grandchild is the beneficiary. The assets are collectively called the trust property. A trust fund’s rules are spelled out in a formal trust deed or agreement, written by a lawyer. That document says who the beneficiaries are, who the trustees are, what assets go in, and how and when the money is distributed.

In Canada, trust funds aren’t something mystical; they’re rooted in ordinary law. One way to think of a trust is like a recipe: the settlor lays out the instructions, the trustee follows them, and the beneficiary enjoys the result.

Who Can Set Up a Trust Fund?

You might wonder: “Do I have to be rich to start a trust fund?” Actually, no. Any Canadian with assets — money, property, investments — can set up a trust fund.

Grandparents, parents, or even aunts/uncles often create family trusts to protect kids or cover a grandchild’s education or living expenses. Even a small inheritance or a modest investment portfolio can go into a trust if you want controlled, tax-savvy distribution.

Is it only for family? Not at all. You can set up a trust for anyone you choose: a sibling, a charity, even a friend. But often in estate planning, it’s family-focused.

How Does a Trust Fund Work in Canada?

At first, trusts seem a bit like magic boxes: you give something to a trustee, and later the beneficiary gets it. But there are clear roles and rules.

Step 1: Draft the Trust Agreement

First, a lawyer writes a trust agreement (often called a “trust deed”). This document names the settlor, the trustee(s), the beneficiary(ies), and describes the assets going in plus how distributions work.

Step 2: Transfer the Assets

The settlor then transfers the assets to the trust. That could mean writing a cheque into a trust account or reassigning property deeds. The donation is often irrevocable.

Step 3: Trustee Takes Charge

Now the trustee holds legal title to the trust assets. They have to manage them responsibly. In Canada, part of being a trustee means filing annual trust tax returns (a T3 return if required), keeping records, and distributing income or capital according to the trust’s instructions.

Step 4: Beneficiary Receives Benefits

The trust deed specifies when and how much the beneficiary gets. It might be a lump sum at a certain age, regular payments, or conditional distributions (like after university graduation).

Types of Trust Funds in Canada

Canada recognizes a variety of trusts, mainly falling into two categories: inter vivos (living) and testamentary trusts.

Living (Inter Vivos) Trusts

• Revocable Trust: Flexible, can be changed, but tax is attributed back to the settlor.

• Irrevocable Trust: Locked in, used to reduce estate taxes or protect assets.

• Alter Ego / Joint Partner Trust: For those 65+, allows deferral of capital gains.

• Spousal Trust: Income for surviving spouse, often used in estate freezes.

• Family Trust: For income splitting and asset protection among family.

• Charitable Trust: Created for specific philanthropic goals.

• Segregated Fund Trusts: Insurance-based investment trusts.

Testamentary Trusts

Created in a will and only come into effect after death. Useful for controlled inheritance or special-needs planning.

Revocable vs. Irrevocable Trust Funds

A revocable trust allows the settlor to change the terms. CRA taxes the earnings back to the settlor. Creditors may still access the assets.

An irrevocable trust locks the assets out of the estate. The trust pays tax on retained income but can shift tax to beneficiaries in lower brackets.

Setting Up a Trust Fund for a Child in Canada

Parents or grandparents commonly set up trusts for children to protect inheritance or plan for education.

Steps:

1. Draft a trust agreement naming the child and trustee.

2. Settle the assets (cash, investments).

3. Open a CRA trust account if over $50K.

4. Trust administration: T3 tax returns, distributions, and recordkeeping.

It helps prevent early mismanagement and can protect assets from creditors or legal guardianship issues.

Tax Implications of Trust Funds

Trusts are taxable at the highest personal rate on retained income. Distributions shift tax to beneficiaries.

Key Rules:

• Attribution Rules: Income might be taxed back to settlor for close relatives.

• 21-Year Rule: Every 21 years, deemed disposition of assets triggers capital gains tax.

• T3 Reporting: Trustees must file returns and Schedule 15 (since 2024).

While trusts don't automatically save tax, they allow strategic tax deferral and income splitting.

Trustee Responsibilities in a Trust Fund

Trustees have a fiduciary duty. Key tasks include:

• Managing assets prudently.

• Following the trust deed to the letter.

• Filing tax returns and handling CRA compliance.

• Keeping detailed records.

• Acting impartially with multiple beneficiaries.

Many families use professionals; others choose trusted relatives.

Trust Fund vs. Will in Estate Planning

• A will takes effect at death and goes through probate.

• A trust can be active during life and after death, avoiding probate and offering more control.

Wills name guardians; trusts control distribution. Most Canadians use both in combination.

Are Trust Funds Still Effective for Estate Planning in 2025?

Despite new CRA rules, trusts are still powerful. They now require more compliance but still provide:

• Probate avoidance

• Tax planning flexibility

• Asset protection

Estate planners still view trusts as versatile and valuable, especially for complex or high-value estates.

Are Trust Funds Losing Their Edge Under Canada’s New CRA Rules?

New reporting requirements have made trusts more transparent and costly. But for large estates or families with special needs, trusts remain effective.

Simpler alternatives (e.g., TFSA/RRSP beneficiaries, joint ownership) may suit smaller estates. It’s no longer “set and forget” — families must weigh control vs. compliance.

FREQUENTLY ASKED QUESTIONS:

Q: What is a trust fund and how does it work in Canada?

A: A legal arrangement where a settlor transfers assets to a trustee, who manages them for a beneficiary. It enables tax-efficient, controlled distribution of assets.

Q: Who can set up a trust fund in Canada?

A: Any Canadian with assets. It’s commonly done by parents, grandparents, or family members for loved ones.

Q: What are the tax implications of a trust fund?

A: Trusts pay tax at high rates on retained income but can deduct distributed amounts. Beneficiaries report the income they receive. Attribution rules and 21-year rules apply.

Q: How does a trust fund differ from a will?

A: A will activates on death and goes through probate. A trust can function while alive and avoid probate. Trusts offer more control but require more administration.

Q: Can I create a trust fund for my child in Canada?

A: Yes. It ensures money is managed until a child reaches a set age. A trust agreement and trustee are required, and reporting may be needed depending on asset size.