Should I Put My House in a Trust? What to Know

Congratulations on your sale, Silvana. Downsizing can be a smart way to supplement retirement income and reduce ongoing costs. Your question about holding a new property in a trust instead of your personal name raises important issues. The answer depends on several tax, legal and cost considerations, so there isn’t a one-size-fits-all solution.

What is a trust?

A trust is a legal arrangement in which a person (the settlor) transfers assets to a trustee to hold and manage on behalf of beneficiaries according to the terms set out in the trust agreement. Common assets placed in trusts include investments, business interests and real estate.

There are two main categories: a living trust (often called an inter vivos trust), created while the settlor is alive, and a testamentary trust, which is created by the terms of a will and takes effect after the settlor’s death.

Related reading: The difference between wills and living trusts

Why people use trusts

Trusts serve a variety of purposes. They can be used for tax planning, to facilitate estate planning, or to protect and manage assets for beneficiaries who may be young, vulnerable, or otherwise unable to manage money themselves. Trusts are also sometimes used to preserve privacy because assets held in trust aren’t always on public record in the same way as assets that pass through probate.

Although many people create testamentary trusts in their wills to protect minor children, those trusts are rarely funded because most parents don’t pass away while their children are still minors. Trusts are also commonly used by business owners: shares can be held in a trust and the income or capital gains allocated among multiple beneficiaries, which in certain circumstances can multiply access to tax reliefs available to qualifying shareholders.

Principal residence exemption

One of the most important factors in your situation is the principal residence exemption (PRE). The PRE allows a homeowner to shelter capital gains on the sale of a qualifying property if the owner ordinarily lived in it for the years being claimed. You can designate only one property as your principal residence for each year, but that designation can apply to houses, condos, cottages or similar vacation properties.

When someone dies, for tax purposes they’re generally deemed to have disposed of their assets. An important exception applies if assets pass to a surviving spouse or common-law partner: in that case, assets can usually be transferred on a tax-deferred basis. If you don’t have a spouse or partner, an executor can claim the PRE for your qualifying home on the final tax return so that no tax arises on the capital gain, assuming the property meets the requirements.

Because of the PRE, transferring your home into a trust solely to avoid income tax on a principal residence is unlikely to provide a benefit in many cases.

Probate and estate administration fees

Where a trust can be useful is in reducing probate fees or estate administration taxes. These fees vary widely by province or territory and are charged to validate a will and enable the executor to distribute estate assets. Some provinces have very low or no probate fees for many estates, while others charge a percentage-based fee that can be significant.

For example, Manitoba and Québec have minimal probate fees for many estates. Alberta has relatively low charges, with a flat maximum fee for larger estates. By contrast, Ontario charges 1.5% on the estate value over a threshold, which on a $1 million estate can amount to roughly $14,250. British Columbia applies a similar percentage structure that can lead to fees in the same general range.

Because these costs vary so much, the potential advantage of using a trust to avoid probate depends heavily on where you live and the size of your estate.

Should you buy the house in a trust?

Trusts do not form part of your personal estate in the same way as assets titled in your name, so they can be structured to avoid probate and to distribute assets directly to beneficiaries. That said, trusts come with setup and ongoing costs. Legal fees to create an effective trust can run into several thousand dollars, and annual accounting and filing requirements for trusts can add recurring costs. Preparing trust tax returns and maintaining required records may cost hundreds or thousands of dollars a year depending on complexity.

For some people, the cost of creating and administering a trust will outweigh the probate savings, especially if the estate value is modest or if you live in a province with low probate fees. A trust may make sense if the property is highly valuable, if you live in a high-fee jurisdiction, or if you have other reasons—such as protecting assets for vulnerable beneficiaries or managing complex family circumstances—that justify the expense and administration.

Because the right choice depends on the interaction of tax rules, provincial probate regimes, family circumstances and costs, it’s wise to seek personalized advice from a qualified estate planning lawyer or tax advisor before transferring a home into a trust.

Read more from Ask a Planner:

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• Making the most of the pension tax credit
• What is the CRA’s Voluntary Disclosures Program?