Using Trusts to Protect Wealth Across Generations in Ontario
How family trusts and testamentary trusts can shelter your estate, reduce taxes, and protect your legacy
Trusts are often associated with the ultra-wealthy or with overly complex tax schemes. In reality, trusts are practical, versatile, and widely used planning tools that offer meaningful benefits to a broad range of affluent Ontario families. For those with $1 million or more in assets, a trust may be one of the most powerful tools available for protecting, growing, and transferring wealth.
This article demystifies how trusts work, the main types used in Ontario estate and tax planning, and the situations where they add the most value.
What Is a Trust?
A trust is a legal arrangement in which one person (the 'settlor' or 'grantor') transfers assets to a trustee to hold and manage for the benefit of one or more beneficiaries. The three parties to a trust are:
The settlor: the person who creates the trust and transfers assets into it.
The trustee: the person or institution responsible for managing the trust assets in accordance with the trust deed. The trustee has a fiduciary duty to the beneficiaries.
The beneficiaries: the individuals or entities who benefit from the trust assets or income.
A trust is not a person — it is a legal relationship. But for tax purposes, it is treated as a separate taxpayer with its own income and tax obligations.
Type 1: The Testamentary Trust — Created Through Your Will
A testamentary trust comes into existence at your death and is created through your will. It is one of the most commonly used estate planning tools for Ontario families.
Spousal trust
Assets from your estate are held in trust for your surviving spouse for their lifetime. The surviving spouse receives income from the trust (and possibly access to capital), and the remaining capital passes to your designated beneficiaries (typically children) upon the surviving spouse's death. This is valuable for blended families where you want to provide for a current spouse while preserving assets for children from a prior relationship.
Children's trust
Rather than having minor children receive funds directly (which would place them under the management of the provincial Children's Lawyer until age 18), a testamentary trust allows you to appoint a trusted trustee and specify when and how distributions are made — e.g., one third at age 21, one third at 25, and the remainder at 30.
Graduated rate estate (GRE)
For the first 36 months following death, an estate that qualifies as a Graduated Rate Estate can use graduated tax rates — the same progressive rates that apply to individuals — rather than paying tax at the top marginal rate on all income. For large estates generating investment income during administration, this can produce significant tax savings.
Tax Advantage of Testamentary Trusts
Before 2016, testamentary trusts could benefit from graduated rates indefinitely. While the rules changed in 2016 to limit most testamentary trusts to the flat top marginal rate after the first 36 months, the GRE benefit remains valuable during the estate administration period. Qualified disability trusts (for disabled beneficiaries) continue to benefit from graduated rates beyond 36 months.
Type 2: The Family (Inter Vivos) Trust — Created During Your Lifetime
An inter vivos trust is established during your lifetime. In Ontario, these are commonly used for income splitting, asset protection, and business succession planning.
Income splitting
A discretionary family trust can hold investments and distribute income to family members in lower tax brackets — such as adult children or grandchildren. The trustee has discretion over how much income each beneficiary receives each year, allowing the family to optimize who pays tax on the investment returns.
Note: CRA's attribution rules limit the ability to income-split with minor children through trusts — most income allocated to minors from a family trust is subject to the 'kiddie tax' and taxed at the top marginal rate. This strategy is most effective once beneficiaries reach adulthood.
Cottage trusts
Transferring a family cottage or vacation property into a family trust can allow it to be enjoyed by multiple generations while managing the capital gains exposure over time rather than crystallizing the entire gain at death. The trust can also facilitate a smooth transfer to the next generation without the complications of direct joint ownership.
Business succession
For business owners, a family trust is often used in conjunction with an estate freeze. The owner 'freezes' the value of their shares today (locking in a fixed tax exposure), while future growth accrues to new shares held by a family trust for the benefit of children and grandchildren. This is a sophisticated strategy that requires experienced tax and legal advisors.
Type 3: The Alter Ego and Joint Partner Trust
For Ontarians 65 or older, an alter ego trust (for a single individual) or a joint partner trust (for a couple) offers a way to transfer assets into a trust during your lifetime while retaining full control and beneficial use of those assets during your lifetime.
Key advantages:
Assets in an alter ego or joint partner trust bypass the probate process at death — the trustee can transfer assets directly to beneficiaries without applying for a Certificate of Appointment of Estate Trustee (probate). On a $2 million estate, this saves approximately $29,500 in Ontario probate fees.
Privacy: trust assets do not become part of the public probate record.
Continuity: if you become incapacitated, the trustee can continue to manage assets without the delay and expense of a power of attorney or court-appointed guardian.
Common Questions About Trusts
Are trusts expensive to set up and maintain?
The legal cost of establishing a well-drafted family or testamentary trust typically ranges from a few thousand to tens of thousands of dollars depending on complexity. Ongoing administration involves annual trust tax filings (T3 returns). For most families using trusts appropriately, the tax and estate savings far exceed the costs.
Can I be both the settlor and a trustee?
In many cases, yes — though there are specific rules depending on the trust type and the tax benefits being sought. Your tax and legal advisors will structure the trust appropriately based on your objectives.
What happens to a trust if the law changes?
Trust law and CRA rules around trusts do evolve. Trusts should be reviewed periodically to ensure they remain optimally structured under current law.
Could a Trust Be Part of Your Wealth Plan?
Trusts are not just for the ultra-wealthy — they are powerful, practical tools for any Ontario family with significant assets and a desire to protect and transfer them efficiently. We work alongside estate lawyers to help our clients evaluate whether a trust structure makes sense and, if so, how to implement it as part of a cohesive wealth plan.
Contact us today for a complimentary consultation
This publication is for informational purposes only and has been prepared from public sources which are meant to be reliable. None of the information in this should be construed as investment advice. Speak to your Investment Advisor to learn if this product is right for you. Designed Securities Ltd. (DSL) is regulated by the Canadian Investment Regulatory Organization (CIRO), and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Christopher Burke is registered to advise in securities to clients residing in Ontario. The views expressed are those of the author and not necessarily those of DSL. This report does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized or to any reliable person to whom it is unlawful to make such offer or solicitation. Content is accurate as of the date of publication, and subject to change without notice.
