An “age 40” trust is simply a trust that is structured in a way that takes advantage of certain opportunities set out in the Income Tax Act. If a trust is created for a minor, and the assets are held on condition that they are not to be received by the beneficiary until some point in the future, but that date will be no later than their 40th birthday, then certain types of tax planning may be available. If the trust is non-discretionary in nature, meaning that the beneficiary is entitled to receive all of the income every year, but it is to be held in trust as mentioned above, then the income can be taxed in the hands of the beneficiary each year until they turn 21, even though it is not paid out to them. Assuming the beneficiary is in a low tax bracket, this may result in the income being taxed at a very low rate, even though the assets themselves will remain in the trust, so the trustees will retain control over them.
An Age 40 Trust created during the settlor’s lifetime will usually be used to split income on capital gains (as opposed to regular income) since income (interest, dividends, rent) on an inter vivostrust is attributed back to the settlor while the beneficiary is a minor. One strategy may be to fully use the young beneficiary’s personal tax credits by triggering capital gains annually. In this way, the adjusted cost base of the trust’s investment portfolio can be continually raised so that when the trust funds are needed for the beneficiary, there may be little if any tax liability associated with cashing in the investments.
These types of trusts may be appropriate if you are considering leaving assets to young beneficiaries, although they are not as frequently used as discretionary testamentary trusts or family trusts, which allow the income and capital to be paid out at the trustees’ discretion.