Using Trusts in Retirement: What You Need to Know
- 3 days ago
- 3 min read
Trusts are often associated with wealthy families or complicated estate plans. But in reality, trusts can either be powerful planning tools or unnecessary complexity, depending entirely on your situation.
In this article, we’ll break down how trusts work in Canada, when they make sense in retirement planning, and when they don’t.
The goal is simple: help you answer the question, “Do I actually need a trust?”
What Is a Trust?
At its core, a trust is a legal arrangement where assets are held by one party for the benefit of another, subject to specific rules.
There are three main parties involved:
Settlor – the person who creates the trust
Trustee – the person who controls and manages the assets
Beneficiary – the person who ultimately benefits from the assets
Rather than transferring assets outright, trusts allow you to control how, when, and under what conditions assets are distributed.
Trusts Created During Your Lifetime (Inter Vivos Trusts)
A trust created while you are alive is called an inter-vivos trust. Common examples include:
Family trusts
Spousal trusts
Alter ego trusts
Key Considerations
Income inside an inter vivos trust is taxed at the top marginal tax rate
Setup and ongoing administration costs can be significant
For many Canadians, the cost-benefit analysis doesn’t justify the complexity
That’s why many people who explore trusts ultimately decide not to implement one and that’s often the right decision.
When Inter Vivos Trusts Do Make Sense
High Net Worth Families & Business Owners
For families with significant assets (often $5M+) or incorporated business owners, trusts can play a role in:
Income splitting (when structured correctly)
Succession planning
Estate freezes
Asset protection
One common strategy for business owners is combining a family trust with an estate freeze, allowing future growth to accrue to the next generation while the original owner maintains control.
This structure can also potentially multiply the Lifetime Capital Gains Exemption (LCGE) when selling a qualified small business.
Attribution Rules: A Major Trap
Many Canadians assume they can shift income to a trust or family member in a lower tax bracket. Tax rules don’t make it that easy.
Attribution can apply when:
Your spouse or common‑law partner is a beneficiary
The trust is discretionary
A minor child is a beneficiary
Failing to structure a trust properly can result in income and capital gains being taxed back to the original owner.
Testamentary Trusts: Created at Death
Unlike inter-vivos trusts, testamentary trusts are set up through your will and activated upon death. These are far more common and far more useful for most families.
Common Uses for Testamentary Trusts
Minor beneficiaries
Control when children receive inheritances instead of receiving everything at 18.
Protecting inheritances
Helps preserve assets in the event of a child’s relationship breakdown.
Blended families
Ensure a surviving spouse is cared for, while preserving assets for children from a previous relationship.
Children with disabilities
A properly structured Henson Trust can preserve government benefits and improve tax efficiency.
4 Critical Tax Considerations with Trusts
Deemed disposition upon transfer
Moving assets into a trust can trigger capital gains immediately.
21‑year deemed disposition rule
Trusts are forced to realize capital gains every 21 years.
Attribution rules
Improper structuring can eliminate intended tax benefits.
Costs
Legal, accounting, and administrative costs matter.
Do You Actually Need a Trust?
For many Canadians, the answer is no, especially beyond basic testamentary planning in your will.
Before considering a trust, ensure you’ve maximized:
TFSAs
RRSPs
RESPs
First Home Savings Accounts
For business owners, families with significant net worth, or those experiencing a liquidity event, a trust may be worth exploring but only as part of a coordinated plan.
Final Thoughts
Trusts are powerful tools but they are not one‑size‑fits‑all solutions. With proper guidance and a coordinated team, they can help protect wealth, control distributions, and manage tax exposure.
When it comes to retirement, don’t take chances.
Make a plan so you can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.