Trusts vs Wills in BC — When Do You Need a Trust?

Will vs trust: the basics

Types of trusts in BC

Testamentary trust (created by your will)

A testamentary trust is set up in your will and only comes into existence when you die. Your executor transfers assets into the trust, and a trustee manages them according to your instructions. Common uses:

• Children's trust: Holds assets for minor children until they reach a specified age (e.g., 25 or 30 instead of 19)
• Spousal trust: Provides income to your spouse for life, then passes the capital to your children — protecting both
• Special needs trust (Henson trust): Holds assets for a disabled beneficiary without affecting their government benefits

Testamentary trusts go through probate (because they're part of your will) but provide ongoing management after death.

Inter vivos (living) trust

A living trust is created during your lifetime. You transfer assets into the trust, and a trustee (which can be you, initially) manages them. When you die, the trust assets pass according to the trust terms — outside the estate and outside probate.

Advantages: probate avoidance, privacy, seamless transition at death or incapacity.

Disadvantages: significant setup cost, ongoing administration, assets must be formally transferred to the trust, and unfavorable tax treatment (highest marginal rate, 21-year deemed disposition).

When you need a trust

Minor children

Without a trust, children inherit their share outright at age 19 in BC. If that share is significant, a trust lets you specify that a trustee manages the money and distributes it for education, housing, and living expenses until the child reaches an age you choose.

Special needs beneficiary

A Henson trust (discretionary trust) holds assets for a beneficiary with a disability without disqualifying them from government benefits like disability assistance or PWD. The trustee has discretion over distributions, so the trust assets aren't considered the beneficiary's own assets. This is a critical planning tool — leaving money directly to a person on disability assistance can cause them to lose benefits.

Blended families

A spousal trust can provide for your current spouse during their lifetime while ensuring your children from a previous relationship ultimately receive the capital. Without this structure, there's no guarantee your spouse will pass anything to your children. See: Estate Planning for Blended Families

Large estates (probate avoidance)

BC probate fees are $14 per $1,000 over $50,000. For a $2 million estate, that's about $27,450. An inter vivos trust avoids these fees on trust assets. But the trust setup and annual maintenance costs must be weighed against the probate savings. For most estates under $1 million, the math doesn't work. See: How to Avoid Probate in BC

When you don't need a trust

• Your estate is straightforward with a clear list of beneficiaries
• All beneficiaries are capable adults
• Beneficiary designations on RRSPs/TFSAs and joint tenancy handle most of your assets
• Your estate is under $1 million and probate fees are manageable
• You don't need ongoing management — a one-time distribution is fine

Tax implications of trusts

Trusts in Canada are generally taxed at the highest marginal rate on any income retained in the trust. There are exceptions:

• Graduated Rate Estate (GRE): For the first 36 months after death, a testamentary trust that qualifies as a GRE is taxed at graduated rates (like an individual)
• Qualified Disability Trust (QDT): A testamentary trust for a beneficiary eligible for the disability tax credit is also taxed at graduated rates
• Income distributed to beneficiaries is taxed in the beneficiary's hands, not the trust's — so distributing income annually can be tax-efficient

Additionally, every 21 years, a trust faces a deemed disposition — all capital property is treated as if it were sold at fair market value, triggering capital gains tax. This is a significant long-term cost of holding assets in a trust.