Trust planning pitfalls: What you should know

Distribution vs accumulation

One of the most important decisions you can make regarding your trust is whether income should be distributed to beneficiaries or kept within the trust. This choice matters because of distributable net income (DNI), which determines how much income can be passed through for tax purposes.

When income is distributed, beneficiaries typically pay the tax, often at lower rates. When income is retained, the trust pays tax at its own compressed brackets. Trusts reach the top rate faster, creating tax drag, or more tax being paid than necessary, which eats into long‑term growth. 

Funding the trust

A trust only works if it owns your assets. Funding a trust means transferring ownership of accounts, real estate, and other holdings into the trust’s name. Failing to do this is one of the most common and costly mistakes, potentially forcing assets through probate, which is the very outcome the trust was meant to avoid.

Start by setting up a proper trust by choosing the type that best aligns with your goals. You'll then open a trust account to hold your cash and investments under the trust’s name and transfer ownership of your other assets into the trust. This requires coordination with banks, custodians, and legal advisors. From retitling accounts to updating deeds and documenting personal property transfers, every asset should be reviewed.

Choosing a trustee

It’s crucial to understand the differences between an individual vs a corporate trustee and consider which will offer you more advantages. 

Individual trustees offer familiarity and low cost, but they may lack financial expertise or face conflicts of interest. Corporate trustees provide structure and can help reduce family tension and ensure professional administration. Corporate trustees charge higher fees, though. Adding a trust protector can offer more oversight.

Common pitfalls to avoid

Careful planning is needed to avoid common mistakes, including:

• Not funding the trust, leaving assets exposed to probate;
• Choosing the wrong jurisdiction, creating unexpected tax exposure;
• Failing to update documents as laws or family circumstances change;
• Using unclear or vague language;
• Transferring business interests without using the correct trust structure; and
• Overlooking health, education, maintenance, and support (HEMS) provisions, or not including language for these needs.

By being proactive when setting up your trust, you can help minimise taxes and prevent unnecessary complications for your loved ones.

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Eric Gargus is a tax director who advises clients on individual and trust tax planning and compliance. He began his career in corporate finance before earning his CPA.