Article

Trusts: A Powerful but Often Misunderstood (and Sometimes Misused) Planning Tool

Family Enterprise Canada

Published: Sep 25, 2026

Michael Goldberg, BComm, LLB, TEP, FEA, Partner and Tax Lawyer at Aird & Berlis LLP and founder of “Tax Talk with Michael Goldberg,” a quarterly conference call series about current, relevant and real-life situations for professional advisors who serve high-net-worth clients.

I spend much of my time working with Canadian families on their legal and tax structures, and if there is one constant across nearly all of those engagements, it is the presence of trusts.

When properly used, a trust can be an incredibly useful planning tool. It can support the smooth transition of a family enterprise, including a family business, help preserve wealth across generations and, in some cases, even contribute to maintaining both family harmony and legacy preservation.

Unfortunately, in my experience, those outcomes are far from guaranteed. For example, I have seen many situations where the use of trusts has led to confusion, conflict and unintended consequences – sometimes to the point of materially damaging family relationships and family wealth.

What is striking is that, in most of those cases, the trusts themselves are not the cause of these consequences. Rather, it is a misunderstanding of what trusts are, how they are formed and how they are used and maintained over time that tends to lead to these consequences.

Why Trusts Are So Often Misunderstood: What Is a Trust?

Part of the challenge of working with families and trusts is that the word “trust” sounds simple and intuitive, leading many people to assume that they understand what a trust is. In reality, a trust is neither intuitive nor simple.

A trust is a legal relationship involving property that separates the rights to property into “legal” ownership[2] and “beneficial” ownership.[3] For example, if you wish to acquire shares of a public company for your children but arrange for me to be the sole registered owner and to manage the shares for their benefit, we would have separated legal ownership of the shares (held by me) from beneficial ownership (held for your children), and a trust relationship would exist.[4]

As will be explained below, the separation of legal and beneficial ownership is what makes trusts both powerful and, at times, difficult for family members to fully understand. It allows for a high degree of flexibility in planning – but it also introduces complexity, particularly when expectations are not aligned with the legal reality of trusts.

How Is a Trust Formed?

With the exception of trusts that are deemed to exist by law, the trust relationship requires the following criteria to be met:

A person or entity, often called the settlor, intentionally deals with identifiable property in a manner intended to create the trust relationship. As a result of the settlor dealing with property, one or more persons or entities, who are known as the trustee or the trustees, will hold legal or registered title to that property.
The trustee or trustees will hold the property for the benefit of the beneficial or equitable owners of the property, who are known as the beneficiary or beneficiaries, and who or which must be a particular person or persons or a sufficiently identified or identifiable class of persons.

In the stock example, you would be the settlor of a trust for the benefit of your children (the beneficiaries) by having arranged for me (as trustee) to be the sole registered owner of the stock.

A settlor doesn’t even need to understand the legal meaning of a trust or use the word “trust” for a trust relationship to arise. What matters is that the settlor’s words or conduct demonstrate the intention necessary to create the trust relationship.

The settlor, trustees and beneficiaries can be natural persons or entities, such as a corporation, or even, with respect to the settlor or beneficiaries, another trust and, interestingly, subject to legal and tax considerations, it may be possible for the same person to hold one or more of the roles of settlor, trustee and beneficiary.

Although most of the trusts I deal with in my practice are established through detailed trust agreements or under a will, certain trusts can be created informally and without a written instrument. For example, a person who already owns a specific property, say shares of a public company, could create a trust by declaring that they are holding the property for the benefit of someone else[5] or even, in some circumstances, through a course of conduct that satisfies the legal requirements to have a trust.[6]

How Can One Tell if a Trust Exists?

A practical way to determine whether a trust exists is to ask a simple question: Who is the real owner of the property, or who is the property really for?

If the answer is someone other than the person who legally owns the property, there is a good chance a trust relationship exists.

A Brief Historical Perspective on the Separation of Legal and Beneficial Ownership (and Why It Still Matters)

The concept of a trust has deep roots in English law, dating back nearly 1,000 years.

One of the early uses of trust-like arrangements arose in medieval England. Landowners, such as feudal lords, needed a way to manage their property while they were away – often for extended periods, including during military campaigns. They would transfer legal ownership of their land to a trusted individual, with the expectation that the property would be managed in their absence and ultimately returned to them or their heirs.

The difficulty was that, under early common law, there was no formal mechanism to enforce those expectations. The person holding legal title could, in theory, refuse to return the property.

This could lead to real injustice. To deal with this injustice, over time, English law developed “equitable” principles that were intended to weigh on the conscience of the trusted person so that the trusted person would act in accordance with those equitable principles. In addition, over time, the trusted person’s role, powers and duties became formalized into the role, powers and duties of what we now know as a “trustee,” and the persons benefitting from this property relationship, who we now know as the “beneficiaries,” began to have real and, depending on the nature of what came to be known as the “trust” relationship, sometimes enforceable rights against the trustees to require them to deal with the property in accordance with the terms of the trust relationship.

While the historical context is quite different from modern planning, the core idea remains the same: separating who controls property from who benefits from it.

That separation continues to be the foundation of trust planning today.[7]

Why This Matters in a Modern Planning Context

Understanding what a trust is – and is not – is critical because the combination of different uses of the trust relationship is nearly endless, which is one of the reasons tax and estate planners like me use them so regularly in our planning.

Trusts can be formed for commercial purposes. Some commercial examples include the structuring of real estate ventures as real estate investment trusts (REITs) or the use of trusts to hold funds as part of an escrow arrangement in a business purchase and sale transaction.

Trusts can also be used for a wide range of personal planning purposes.

There are many different types of personal trusts, including asset protection trusts, which may be used to protect property from creditors; bare trusts, under which the trustee may be the public face of property ownership but generally has no independent authority to deal with the property without the beneficiary’s direction; and testamentary trusts, which are created under a person’s will to carry out their wishes after death.[8] In my practice, the type of trust I encounter most frequently is the “discretionary” family trust, often referred to simply as a “family trust,”[9] which is commonly used as part of an individual’s broader estate, continuity and succession planning.

In the family context, trusts are often used to:

facilitate intergenerational wealth transfer;
provide flexibility in how, when and whether any particular beneficiary or beneficiaries will receive trust assets;
assist with governance and control of family enterprises, including to better protect assets from potential future creditors of family members; and
support tax planning objectives.

The flexibility of the trust structure is one of its greatest strengths. Trusts allow planning to be tailored to the specific needs and circumstances of a family.

At the same time, that flexibility can also be a source of risk.

When Flexibility Becomes a Problem

Because trusts allow for so many different variations and uses, they can be difficult to fully understand – even for those who work with them regularly.

In my experience, many issues arise when individuals assume that a trust will operate in a way that feels intuitive or “fair,” without fully considering the legal framework that governs it.

Common misunderstandings include:

assuming that a person who contributes property to a trust continues to control that property;
assuming that beneficiaries are entitled to receive assets, rather than their rights to receive assets being dependent on trustee decisions; and/or
assuming that a trust can be adjusted or unwound easily if circumstances change.

These assumptions are often incorrect, and when they come into conflict with the actual legal structure, the consequences can be significant.

This is where the distinction between a trust as a concept and a trust as a legal relationship becomes especially important.

A Practical Observation

In my experience, trusts themselves are rarely the source of problems.

Rather, problems tend to arise from:

a lack of understanding of what trusts are at the outset;
poor implementation of trust structures;
failure to maintain or administer a trust structure properly; and/or
misalignment between the trust structure and the broader estate, succession and continuity plan of the person or persons driving the estate succession and continuity planning (in this series of articles, referred to as the “Wealth Creator”).

These are human and planning issues – not fundamental flaws in the trust concept.

With proper education, thoughtful design and ongoing attention, the impact of many of these issues can be minimized or avoided altogether.

Setting the Stage for the Discussion Ahead

This article is intended to provide a foundation for understanding trusts at a conceptual level. This article is Part I of a series. Before considering more technical issues – such as tax rules, family law implications or planning strategies – it is important to understand what a trust actually is and how it functions.

In the articles that follow, I will build on this foundation by exploring:

how capital gains taxation, trust taxation and family law considerations affect Canadian trust planning;
how family trusts are used in estate freeze planning; and
where trust arrangements most commonly go wrong – and how those outcomes can often be avoided.

Trusts can be extremely effective planning tools. But like any powerful tool, their effectiveness depends on how they are understood and used.

Conclusion

Trusts occupy a central place in Canadian tax, estate, continuity and succession planning, particularly for families with business or investment assets. Their ability to separate legal and beneficial ownership allows for a level of flexibility that is difficult to achieve through other structures. At the same time, this feature tends to make trusts inherently less intuitive to family members and even to professional advisors.

In my experience, the most significant risks associated with trusts do not come from the structures themselves but from misunderstandings about how they work. When those misunderstandings are combined with complex family dynamics or significant financial stakes, the results can be challenging.

The goal of this series is to help bring more clarity to trust discussions with families and other clients.

A better understanding of trusts will not eliminate all risks, but it can go a long way toward ensuring that these structures achieve the objectives they are intended to serve.

[1] The author thanks Megan Lambert of Aird & Berlis LLP for her careful review of this article and her thoughtful comments regarding trust planning and related trust issues.

[2] Sometimes referred to as “registered” ownership.

[3] Sometimes referred to as “equitable” ownership.

[4] We would need to agree on the precise terms of the trust relationship.

[5] There may be legal impediments to a trust being created in this way for certain types of property. For example, the Statute of Frauds, R.S.O. 1990, c. S.19, will require trusts involving land in Ontario to be evidenced in writing.

[6] Legally, for a trust to exist, the “three certainties” (certainty of intention, certainty of subject matter and certainty of objects (beneficiaries)) must be satisfied. See generally Waters’ Law of Trusts in Canada, 5th ed.; see also Knight v. Knight (1840), 3 Beav. 148, 49 E.R. 58. Sometimes trusts will be deemed to exist based on law established in cases or under statute. Those trusts will typically not need to meet the above-mentioned requirements and will not be dealt with in this series of articles.

[7] Interestingly, civil law jurisdictions (e.g., France, Italy and Quebec), which did not derive their laws from English common law, do not have a traditional concept of trusts, though some civil law jurisdictions have developed their own trust-like concepts. The series will not address trusts of this nature.

[8] In addition, it is worth mentioning that the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.) (the “ITA”), has legislatively created a number of classes of special lifetime trusts, for example, spousal trusts and alter-ego trusts (AETs), which can serve important planning functions, but we won’t be discussing in the series.

[9] At the risk of oversimplifying, these are trusts designed to benefit families and structured to provide the trustees with broad discretionary decision-making powers. Unless otherwise noted, references to “family trusts” in the series will always assume that the trusts are discretionary family trusts. Please note that family trusts can be formed while a person is alive or through their will.

Michael Goldberg is a partner in the Aird & Berlis Tax and Estates & Trusts Groups, where he advises privately owned Canadian corporations and high-net-worth individuals on domestic and international tax planning, estate planning, business succession and wealth transfer strategies. Known for his dedication to client service and relationship-building, Michael holds the Family Enterprise Advisor designation, reflecting his commitment to serving as a trusted advisor to family enterprises and high-net-worth clients.