One Hat Too Many: Risks of Overlapping Roles in Family Trusts
By: Kathleen Danganan and Aaron Grinhaus
Not written by AI

A trust is an important estate planning tool which helps control the succession of your assets, provides asset protection and if properly constituted can provide tax benefits. Ontario law does not expressly prohibit the same individual acting as settlor, trustee, and/or beneficiary in the same trust. However, there are risks when such roles overlap.

The settlement of a trust relies on the separation of legal and beneficial ownership. When one person fulfills both roles, that separation no longer exists, creating an inherent conflict of interest. Overlapping roles could trigger unfavourable tax consequences. For example, all income and losses, as well as capital gains could be attributed back to the settlor and taxed in the settlor’s hands.

The above-mentioned risks can be minimized by:

• having a settlor who is neither a trustee nor beneficiary and who therefore does not have any interest in the trust;
• appointing multiple trustees, including one independent trustee who has no beneficial interest in the trust;
• where there are more than two trustees, requiring a majority vote that must include the independent trustee; and
• requiring the trustees’ decisions related to the management of the trust to be documented in writing.

If you are looking to set up a family trust, please contact us to learn more about your options. We would be happy advise you on a sound estate plan and guide you through the process to ensure that your trust is set up in a way that maximizes your intended benefit and minimizes the risks.