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Estate planning means planning for the future. Since the future is seldom known, it can be a tricky business. Trusts can play an important role in estate planning by providing the flexibility to deal with widely different situations and unexpected events.

A typical estate plan may include "freezing" the value of a particular asset. There are many ways to accomplish a freeze and many variations on each method.

One popular type of freeze involves the transfer to a corporation of an asset expected to increase in value, such as shares in a family-owned business, in exchange for preferred shares of the corporation. The preferred shares will have a value equal to the value of the asset transferred and are designed so that they will not increase in value.

Common or growth shares of the corporation are then issued to the person or persons who are to benefit from the increase in value of the assets to be frozen. Typically, the growth shares are issued to the intended heirs of the freezer, perhaps the freezer's children.

Any increase in the value of the frozen asset after the date of the freeze will accrue to the growth shares and, therefore, to the beneficiaries of the freeze.

Since the value of the freezer's interest in the frozen asset will not increase over time, the value of the asset is said to be frozen. When the freezer dies, death taxes will be based on the frozen value rather than the actual market value of the frozen asset at the time of death.

In order to be effective, a freeze must be designed to stand the tests of time and changing circumstances. If one waits until all of the uncertainties of family and business have been sorted out, many, if not all, of the advantages of a freeze may be lost.

The use of a discretionary trust permits the design of a freeze that is flexible enough to evolve with and adapt to important changes in circumstances.

A trust is a legal relationship that permits a person, called the "trustee", to have effective control over an asset for the benefit of other persons, called the "beneficiaries."

The trustee has a duty to act in the best interest of the beneficiaries. Under the terms of a discretionary trust, the trustee will usually have wide discretion with respect to both when and to whom the income produced by the assets held in trust, and eventually the assets themselves, will be distributed.

For instance, a discretionary trust could be set up for all of the children and grandchildren of the freezer. The trustee, who might be freezer or person chosen by him, could be empowered to determine to which of the descendants of the freezer the income, and, eventually, the assets of the trust should be distributed.

There are a number of situations where a discretionary trust may be a benefit in the context of an estate freeze.

If the beneficiary of an estate freeze (perhaps the freezer's child) dies before the freezer and the growth shares are owned by the deceased child, the result of the estate freeze may be to hasten rather than defer taxation.

If, however, the growth shares are not owned by the child but are held in trust for all of the freezer's children and grandchildren, then the death of the potential beneficiary may have no tax impact. A discretionary trust can also provide valuable protection of family assets against creditors of the beneficiary of a freeze. For instance, the bankruptcy of a child who owns growth shares in a family business could be a family financial disaster.

If however, the child was not a shareholder of the family business but merely a potential beneficiary of a discretionary family trust which was a shareholder of the family business, it is likely that the child's financial difficulties would have little or no financial impact on the family business and the rest of the family.

A discretionary trust can also protect its beneficiaries against their own spending habits. If dividends are paid on growth shares held directly by a beneficiary, the beneficiary may invest or spend the cash as he or she wishes.

If, instead, dividends are received by a trust, it will be the trustee who determines whether the funds should be retained in the trust and reinvested, used for the benefit of a beneficiary, or distributed to a particular beneficiary.

In many cases, an individual may be ready for an estate freeze from an economic point of view before he is prepared from a family point of view to make certain decisions.

For instance, although an individual might be secure enough financially to desire to begin the process of transferring wealth to subsequent generations, it may be difficult for the individual to decide which beneficiary should benefit from the growth of the value of the shares of the family business.

This may be the case where the desired beneficiaries include children or even young adults. The use of a discretionary trust in these circumstances permits the freezer to achieve the economic benefit of an estate freeze immediately while deferring the choice of specific beneficiaries until a later date.

Some are uncomfortable with an irrevocable, irreversible estate freeze. This concern can be alleviated by including the freezer as one of the potential beneficiaries.

If this approach is taken, the freezer should not be the sole trustee. In the United States, estate plans that involve the transfer of wealth from an individual to another individual two generations removed (for example, from an individual to his or her grandchildren) must deal with punitive generation-skipping taxes.

In comparison, Canada is an estate-planning paradise because our tax laws do not include specific generation-skipping taxes. The use of a discretionary trust to accomplish a freeze greatly increases the potential for generation skipping by permitting the distribution of growth shares to grandchildren of the freezer who were not even born at the time of the freeze.

In this fashion, death taxes with respect to the frozen asset on the death of the children of the freezer, can be reduced or avoided completely.

The use of a trust can prevent assets from falling into a community of property, or matrimonial sharing of property upon the marriage of a beneficiary of the freeze.

Finally, a trust can be used to hold assets for minor children who are not capable of adequately dealing with certain types of assets. Trusts are an invaluable aid to the estate and financial planner. They are, however, under-utilized, especially in Quebec, which lacks the common-law traditions where trusts were initially developed.

Quebec's laws on trusts have been substantially expanded and improved as part of the reform of Quebec's Civil Code. These changes came into force on January 1, 1994, and have made Quebec's trust law significantly more complete and flexible.