Are you looking for a way to distribute some of your assets during your lifetime? Do you want to make sure your children are taken care of? Or you may be trying to avoid a hefty tax bill in the future.

If so, consider creating an inter vivos trust. But what is that, you ask?

You can set yourself up for financial success in many ways—both during your lifetime and after passing away. 

Therefore, if you’re not knowledgeable about inter vivos trusts yet, don’t worry!

Today, we want to help educate you on another excellent choice for helping you build your wealth. We’ll go over what inter vivos trusts are and how they work.

By the end of this article, we hope you’ll have a better idea of whether this is an appropriate option for your situation.

Don’t forget; you can always consult our team at Insightful Wealth Group for advice and better insight into your investments!

What Is an Inter Vivos Trust?

Let’s start with the answer to the most essential question: What is an inter vivos trust?

An inter vivos trust is a type of trust that is created during your lifetime. It allows you to transfer assets to a trustee who will then manage them on behalf of your beneficiaries. 

This type of trust differs from a testamentary trust, created through your will and comes into effect only after your death.

How Does an Inter Vivos Trust Work?

When you create an inter vivos trust, you are the settlor, meaning you’re the person who creates the trust.

You will transfer your assets to a trustee to manage them for your beneficiaries. 

In the case of a family inter vivos trust, your beneficiaries are usually your children, and the trustee could be your spouse, a trusted relative, or a professional advisor.

Benefits and Disadvantages of an Inter Vivos Trust

An inter vivos trust can offer several benefits, but it’s also important to consider the potential drawbacks. 

Here are some pros and cons to remember when deciding whether an inter vivos trust is suitable for you.

Benefits

• Retain control over your assets: One of the most significant advantages of an inter vivos trust is maintaining control over your assets while still providing for your beneficiaries. This can be especially useful if you have concerns about how your beneficiaries may handle a large inheritance.
• Avoid probate: Probate is the legal process by which a deceased person’s assets are distributed to their heirs or beneficiaries according to their will (or state law if there is no will). Assets held in an inter vivos trust are not subject to probate, which can be time-consuming and expensive. By avoiding probate, you can ensure that your assets are distributed more quickly and efficiently to your beneficiaries.
• Potential tax savings: Depending on your specific situation, there may be tax advantages to setting up an inter vivos trust.  For example, you can reduce the overall tax liability on your estate or provide tax-free income to your beneficiaries.
• Privacy: Unlike a will, which becomes a matter of public record once it goes through probate, an inter vivos trust can be kept private.

Disadvantages

• Cost: Setting up an inter vivos trust can be more expensive than simply creating a will, as it typically requires the assistance of a lawyer or other professional.
• Loss of control: While an inter vivos trust allows you to maintain some control over your assets, you may still need to give up some level of control to make the trust effective.
• Tax implications: As noted earlier, an inter vivos trust can have tax implications that you should be aware of. Depending on your circumstances, these tax implications may be a disadvantage.
• Irrevocability: In many cases, once an inter vivos trust is created, it cannot be undone. 

This means you should be very sure of your decision before establishing a trust.

So, now you know. An inter vivos trust can be a valuable tool for estate planning. Still, it’s crucial to carefully consider the potential benefits and drawbacks before deciding. 

Talking to a lawyer or professional estate planning advisor can help you better understand whether an inter vivos trust is the right choice for you.

More Questions? Call Our Experts at Insightful Wealth Group for a Consultation

3 Common Uses in Estate Planning

Inter vivos trusts are flexible and can be helpful in various estate planning situations. Some of the most common uses include the following:

1. Caring for a Disabled Dependent

If you have a disabled dependent, you can create an inter vivos trust to secure their financial future. 

This trust allows income earned in it to be taxed in the beneficiary’s hands, without actually distributing the income from the trust. This can result in more significant accumulation of funds. 

However, this election can only be made if the beneficiary is typically eligible to claim the disability tax credit.

2. Providing Income for a ‘Spendthrift’ Dependent

Suppose you’re worried your child or another dependent may be unable to manage large amounts of money well. In that case, an inter vivos trust can be used to distribute smaller amounts of income and capital. 

This trust allows you to dictate the conditions under which the income is distributed to the beneficiary. 

You can also consider an arm’s-length corporate trustee to manage the financial arrangements for your child.

3. Freezing the Value of Recreational Property

Do you own a second property?

If so, and you plan to leave it to your children, consider transferring ownership of it now, to avoid a hefty future tax bill on accumulated capital gains. 

To retain control over the property, you could use inter vivos trust. The terms of the trust guarantee you access to the property at your discretion.

However, this strategy has a disadvantage: you are deemed to have disposed of the property at the time of the transfer. 

Half of any resulting capital gain must be considered income for tax purposes.

If you sell the property to the trust and take back a note payable for the total amount, a portion of the tax could be deferred for up to five years.

Ongoing Tax Implications

We mentioned tax implications above. And depending on your situation, these implications can benefit or disadvantage you.

Before setting up any trust, being aware of the tax issues involved is essential.

The trust is considered a separate taxable individual, meaning it must file annual tax returns. 

Here are some basic points about taxes and inter vivos trusts:

• Any income earned in an inter vivos trust and not distributed to beneficiaries is taxed at the maximum rate in your province
• Income that is distributed to adult beneficiaries is taxed in their hands
• Investment income retains its character, meaning only half of a capital gain is subject to tax, and the dividend tax credit on Canadian dividends is available.

Decide if an Inter Vivos Trust Fund Helps You!

Congratulations, now you know crucial information about vivos trust funds.

It’s obvious that Inter vivos trusts can be a valuable tool in estate planning that can help you distribute your assets during your lifetime.

However, utilizing them must be done strategically, especially since there are some significant tax implications to consider before setting one up.

It’s always a good idea to consult a professional advisor to ensure you make the best decisions for your situation!

Disclaimer: The information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, [FA Name], and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.