Wills and trusts often come up together in estate planning conversations, and people sometimes use the terms as if they were interchangeable. They are not. Each serves a different purpose, operates in a different way, and carries different legal, tax and administrative considerations.
Understanding how they work can help you decide which tools suit your circumstances, and whether you need one or both.
What a Will Does
A will is a legal document that sets out how your assets are to be distributed after your death. It allows you to name an executor, identify beneficiaries, and, if you have minor children, appoint a guardian.
A will takes effect only upon death. In many provinces and territories, the executor must apply to the court for probate, which confirms the will’s validity and the executor’s authority. Probate fees and processes vary across the country. Once probated, a will may also become a matter of public record, depending on the jurisdiction.
Without a valid will, provincial or territorial intestacy legislation determines who inherits, and the result may not reflect your wishes.
What a Trust Does
A trust is a legal arrangement in which a person (the settlor) transfers assets to a trustee, who holds and manages them for the benefit of one or more beneficiaries. The trustee is bound by the terms of the trust.
Trusts generally fall into two categories:
- Testamentary trusts, which are created through a will and take effect upon death.
- Inter vivos (living) trusts, which are created and funded during your lifetime.
Because assets held in a trust are owned by the trust rather than by you personally, they may pass outside the estate. A trust can also specify when and under what conditions beneficiaries receive funds.
The Key Differences Between Wills and Trusts
The most important distinction is timing and control. A will governs what happens at death. A trust can operate during your lifetime, after your death, or both, and can continue to manage assets for years afterward.
When a Will May Be Enough
For many Canadians, a well-drafted will is the foundation of a sound estate plan. It may be sufficient if your estate is relatively straightforward, your beneficiaries are adults, and you are comfortable with them receiving their inheritance outright. A will also remains the primary way to name guardians for minor children.
When a Trust Offers Additional Benefits
A trust may be worth considering when you want greater control or flexibility, such as:
- Managing an inheritance for minor children or young adults
- Providing for a beneficiary with a disability, or one who may have difficulty managing money
- Keeping certain assets private and outside the probate process
- Providing for a surviving spouse while directing the remaining assets to children from a prior relationship
- Planning for incapacity, since a trustee can manage assets if you are unable to
Trusts also involve costs and obligations. They can require legal drafting, ongoing administration and annual tax filings, and most trusts must meet CRA reporting requirements. Their tax treatment can be complex, and trusts are generally subject to a deemed disposition of their assets every 21 years.
Situations Where You May Need Both
Wills and trusts often work together rather than compete. A will can create a testamentary trust, directing that assets for minor children be held and managed by a trustee until they reach a specified age.
Similarly, if you establish a living trust during your lifetime, you will still need a will to address any assets not held in the trust. This is sometimes called a “pour-over” approach, in which remaining assets are directed into the trust after death.
Business owners, blended families, and those with significant assets or beneficiaries with special needs are among those who commonly use both tools.
Common Misconceptions About Wills and Trusts
“Only wealthy people need trusts.” Trusts can be useful in many situations, such as providing for a child or a dependent with a disability. Eligibility is not based on wealth, but on whether the structure meets a specific need.
“A trust eliminates taxes.” Trusts do not automatically reduce or avoid tax. Income and gains may be taxed in the trust, and most trusts are taxed at the highest marginal rate, with limited exceptions.
“A will avoids probate.” A will does not avoid probate. In most cases, it is the document submitted to the court during the process.
“My spouse and I can rely on joint ownership instead.” Joint ownership can pass assets directly to the survivor, but it may create unintended outcomes, including loss of control, exposure to a co-owner’s creditors, and conflicts with the wishes set out in your will.
“I can wait until I’m older.” Incapacity and unexpected events are not limited to later life. Having a plan in place earlier is generally easier than creating one under pressure.
Building an Estate Plan That Reflects Your Goals
An effective estate plan starts with your objectives. Consider who you want to provide for, how and when they should receive assets, and what matters most to you, whether that is simplicity, privacy, control or tax efficiency.
From there, a lawyer and a financial or tax professional can help determine which tools fit. Your plan should also include powers of attorney, up-to-date beneficiary designations on registered accounts and insurance, and a periodic review as your circumstances change, such as after a marriage, separation, birth, or significant change in assets.
