Over the past few months, many people have asked me whether they should place their assets into a trust (formally known as an inter-vivos trust and colloquially referred to as a living trust) rather than relying on a will. This question often comes up after clients read articles online or watch estate-planning content that presents living trusts as a standard or even superior option to a will.
Living trusts are very common in the United States, which means much of the information available online is written by U.S. lawyers. However, the tax and estate-planning rules in Canada are materially different, and strategies that work well south of the border often do not translate well in Ontario.
Tax Treatment of Living Trusts
In Canada, a trust is treated as its own legal entity. This means it must report income and pay taxes separately. Most living trusts are taxed at the highest marginal tax rate. They do not benefit from the lower tax brackets that individuals receive. This applies to interest income, rental income, and sometimes capital gains earned inside the trust.
Many of the historical tax advantages associated with trusts, including income splitting, have been significantly restricted or eliminated under changes to the Income Tax Act. Today, for most individuals, a living trust does not reduce taxes and can, in fact, increase them.
Ongoing Costs During the Settlor’s Lifetime
Another key consideration is timing. Unlike probate fees, which are paid once after death, the tax and accounting costs of a living trust are paid during the person’s lifetime. A trust must file a T3 tax return every year, regardless of whether there has been significant activity. Recent reporting requirements have also increased the level of disclosure required from trustees.
In practical terms, this often means annual accounting fees and ongoing administrative costs for as long as the trust exists. These are costs the individual bears year after year while alive, not expenses deferred until death.
Probate Is Often Less Expensive Than Expected
Living trusts are frequently promoted as a way to avoid probate and probate tax (formally known as Ontario’s Estate Administration Tax). While probate does carry a cost, it is often less expensive than people assume, particularly when weighed against the cumulative cost of maintaining a trust over many years.
Also, many assets (such as life insurance, registered accounts with named beneficiaries, and jointly owned property), if planned properly, pass outside of probate anyway. These assets avoid probate without the use of a trust.
Why Trust Transfers Are Difficult (and Sometimes Impossible) to Undo
When assets are transferred into a living trust, they are legally moved out of the individual’s ownership and into the trust. This is not just an administrative step, it is a real legal and tax event. Once that transfer happens, several consequences follow.
First, the transfer itself may trigger tax. In many cases, moving assets into a trust is treated as a disposition at fair market value for tax purposes. If capital gains tax is triggered at the time of transfer, paying that tax does not get reversed simply because the asset is later moved back out of the trust. Undoing the trust can create a second tax event (a transfer from the trust back to the individual is often treated as another disposition), resulting in additional capital gains tax, even though no real economic gain has occurred.
Second, legal ownership and control change. Once assets are in a trust, they are governed by the trust deed. Trustees must act according to the terms of the trust and in the interests of the beneficiaries. This can limit how easily assets can be transferred back, especially if there are multiple trustees or beneficiaries, or if the trust terms restrict reversals.
Finally, some planning consequences cannot be reversed at all. For example, if a principal residence is transferred into a trust, the principal residence exemption may be lost or restricted.
What a Living Trust Does Not Do
As noted earlier, a living trust does not eliminate income tax or capital gains tax. Every trust must file a T3 tax return every year, even if there is no activity. New reporting rules also require detailed information about trustees, beneficiaries, and anyone who controls the trust.
This often means paying an accountant every year and keeping detailed records. These costs continue for as long as the trust exists.
A will, on the other hand, does not create this kind of ongoing paperwork during your lifetime.
When a Living Trust May Be Appropriate
There are circumstances where a living trust can be an effective planning tool, such as incapacity planning, special needs planning, or certain complex family or business situations. These cases are the exception, not the rule, and require careful analysis.
Many people consider using a trust because they have minor children, without realizing that a will is the primary planning tool for children. Through a properly drafted will, parents can appoint a guardian for minor children, set out how and when funds should be used for their care, education, and support, and name trustees to manage those funds until the children reach an appropriate age. This approach allows parents to maintain control, provide structure, and reduce uncertainty, without the complexity and ongoing cost of a living trust during their lifetime. While a will does typically create a trust for minor children after the parents’ death, it is generally less expensive and more efficient, as it is implemented only after death rather than maintained throughout the parents’ lives.
Final Thoughts
Living trusts are not inherently bad tools, they are simply often misunderstood. In Ontario, for most people, a properly drafted will combined with thoughtful estate planning achieves the desired outcome with far less complexity and cost.
Before acting on trust planning information found online, it is worth speaking with a lawyer who understands Ontario estate planning and can assess whether a trust is appropriate in your specific circumstances, taking into account tax consequences, ongoing costs, and long-term implications.
PLEASE NOTE: The content of this blog is provided for informational purposes only and does not constitute legal advice. Reading this material does not create a solicitor-client relationship. This information has been prepared in accordance with the laws currently applicable in Ontario and may not reflect future legal developments.
