Trusts and foundations are two important legal structures in Quebec, both used for asset management, estate planning, and philanthropy. To better understand these two concepts and their distinct advantages, here is a complete overview of the definition of trusts and foundations, as well as their respective structures.
Trusts: Definition, Benefits, and Regulations
A trust is a legal arrangement where a person (the settlor) transfers ownership of assets to another person or entity (the trustee), who manages these assets for the benefit of one or more people (the beneficiaries).
There are different types of trusts, each with its own conditions:
- Family Trust: A family trust protects family assets and passes them from one generation to the next. It can help with estate planning and asset management for family members.
- Testamentary Trusts: Created by a will, a testamentary trust comes into effect upon the settlor’s death. It allows for the management of assets according to the conditions specified in the will.
- Inter vivos Trust: Established while the settlor is alive, this type of trust takes effect immediately. It is often used for tax or estate planning purposes.
- Discretionary Trust: In this type of trust, the trustee has the authority to decide how and when the assets are distributed to the beneficiaries.
What are the benefits of creating trusts?
Now that you know the definition of a trust, let’s look at the advantages it offers! Firstly, a trust is a estate planning tool. It allows for the precise management of asset distribution after death, according to the settlor’s wishes. Additionally, it helps protect assets from creditors for legal claims.
Finally, a trust often helps to reduce taxes. It can offer tax benefits by distributing income among beneficiaries in different tax brackets.
Obligations and regulations surrounding trusts in Quebec
Trustees have strict fiduciary duties, including a duty of loyalty and a duty of care. They must manage the assets in the interest of the beneficiaries.
Trusts are also required to file a separate tax return and may be subject to specific taxes. Income distributed to beneficiaries must be reported on their individual tax returns.
Foundations: Definition and Characteristics
A foundation is a non-profit organization created to achieve philanthropic goals, such as supporting social, educational, or cultural causes. Foundations can be private or community-based. Here’s what distinguishes these two categories:
- Private: Primarily funded by a donor or family, it uses its resources to support causes chosen by the founders.
- Community: Generally funded by donations from various individuals or groups, it supports a variety of causes within the local community.
What are the benefits of creating foundations?
First, foundations have a philanthropic impact. They allow resources to be concentrated to support specific projects and causes. Additionally, they also reduce taxes. Donations made to a foundation are generally tax-deductible for the donor, and the foundation itself enjoys certain tax benefits.
Finally, foundations are often managed by professionals, ensuring that funds are used efficiently for the foundation’s goals.
Obligations and regulations for foundations
Foundations must comply with provincial and federal regulations, including registration with tax authorities and financial reporting. In addition, they are generally required to disclose their activities and finances, ensuring transparent and responsible measures.
What distinguishes a trust from a foundation?
Now that you know the definition of a trust and a foundation, let’s look at the specifics of each based on their objectives, management models, and tax advantages.
1. Objectives
| Trust | Foundation |
| Primarily used for asset management and distribution, often in a family or personal context. | Focused on philanthropic and community objectives, with a specific mission to support causes or projects. |
2. Different types of management
| Trust | Foundation |
| Managed by a trustee who must act according to the terms of the trust and the interests of the beneficiaries. | Managed by a board of directors or professional managers, with policies and procedures for fund distribution. |
3. Tax advantages of trusts and foundations
| Trust | Foundation |
| The income generated by the trust’s assets may be taxable, and the trust itself must file a tax return. | Contributions to a foundation are often tax-deductible for the donor, and the foundation enjoys various tax benefits. |
Which professionals should you consult to create a trust or foundation?
To establish a trust or foundation, it is essential to consult a notary or lawyer specializing in trust and estate law. Additionally, a tax accountant can help structure the trust or foundation to maximize tax benefits and achieve your desired goals.
By definition, trusts and foundations are powerful tools for asset management, estate planning, and philanthropy. By understanding their structures, benefits, and obligations, you can use these mechanisms to protect your assets, achieve your estate planning goals, and support important causes.
Would you like to maximize the benefits of your trust or foundation and ensure legal compliance? Contact one of our tax experts to discuss your situation!
