Trusts can be used in several areas of the estate planning process. Essentially what a trust is, is a legal mechanism whereby the benefit of property is transferred to one or more persons while it is controlled by another person (or persons). The trust is an equitable obligation which binds the trustee to deal with the trust property for the benefit of the beneficiaries. The key element is the separation of legal and beneficial ownership. The trustee holds legal title to the property, while the beneficiaries have beneficial ownership.

While a trust is not a separate legal entity like a corporation, it is treated as a separate person for income tax purposes. While items such as the powers of trustees and distributions of income and capital are set out in the trust deed, these provisions have to be drafted with various income tax rules in mind.

There are two types of trusts - inter vivos (living) trusts and testamentary trusts. An inter vivos trust is a trust which arises during the settlor's lifetime. A testamentary trust is a trust which arises on a person's death, typically created by a will.

Inter vivos trusts

The following are examples of common inter vivos trusts:

• Family trust: A family trust is a trust which is commonly created for the benefit of children and other family members. Objectives of a family trust include providing financial support to family members and income splitting, whereby income and capital gains are taxed in the hands of beneficiaries at lower tax rates. However, attribution rules limit income-splitting opportunities, especially in the case of minor children.
• Alter ego trust: An alter ego trust is a trust created by a person over the age of 65 in which they are the only person entitled to receive or use the income and capital of the trust prior to their death. Common reasons for an alter ego trust are to avoid estate administration tax and the public disclosure of assets which occurs through the process of obtaining a certificate of appointment of estate trust with a will.
• Joint partner trust: A joint partner trust is similar to an alter ego trust. It is created by a person over the age of 65 in which the settlor and the settlor's spouse or common-law partner are entitled to receive or use the income and capital of the trust before the later of their deaths.
• Henson trust: A Henson trust is a trust created to provide for the maintenance and support of an individual with a disability, while ensuring the individual is entitled to collect certain government benefits, such as under the Ontario Disability Support Program.

Testamentary trusts

The following are examples of common testamentary trusts:

• Spousal trust: A spousal trust is a trust created for the benefit of a spouse. The spouse must be entitled to all of the income of the trust during the spouse's lifetime. A spousal trust is often created to ensure a spouse is cared for during their lifetime, while controlling who receives the capital of the trust on the spouse’s death.
• Trust for minors: A trust can be created for the benefit of minor children or grandchildren. These trusts are typically found in will provisions dealing with the joint death of parents. Trusts for minors can also be used to provide for the education of grandchildren or to gradually distribute amounts to young adults until they reach a certain age.
• Spendthrift trust: A spendthrift trust is used where a beneficiary is incapable or has difficulty properly managing money.