Estate Planning Tools – Trusts
Testamentary and life interests Trusts
Previous posts discussed wills and joint tenancy as they are used for estate planning. This post is about trusts. There are two different kinds – testamentary, created as a result of death of a will maker, and inter vivos, created during life time of a settlor. There are different types of the inter vivos trusts.
Trusts may be used for tax and non-tax reasons.
Income of the inter vivos trusts is taxed at a flat top-rate tax applicable to individuals. Income paid to beneficiaries under the trust is deductible to the trust and is taxed in hands of these beneficiaries. In order to obtain tax benefit tax rates applicable to the beneficiaries should lower that a tax rate applied to the trust.
Once the asset is transferred to a trust, the asset no longer belongs to the transferor and, thus, upon his or her death will not form a part of the estate to be administered and, thus, will not be subject to the probate tax. Prior to transfer of the asset probate tax, the property transfer tax (“PTT”) and other costs and expenses should be considered.
Non-tax uses examples are:
- Asset management and protection;
- Avoiding compulsory succession;
- Providing for the disabled.
Asset management and protection
Using a discretionary inter vivos trust provides for flexibility: the settlor can delegate making decisions to the trustees to be made pursuant to certain specific terms but at their discretion over time once the circumstances evolve and change rather than making those decisions once and for all. For example, giving an asset to a child, who is most likely to squander the funds, is not as prudent as, subject to the fraudulent conveyance under the Wills, Estates and Succession Act (“WESA”), transferring this asset into a trust for that child with provisions of distributing income for the benefit of the child.
It is often difficult for the creditor to attack the debtor’s interest in a discretionary trust because the value of that interest depends upon decisions of the trustees. The terms of the trust may include special provisions for further protection of the asset, such as for the child to be disqualified as beneficiary if that child becomes bankrupt. Or the trust itself may be created in a jurisdiction with asset protection trust legislation which will preclude the trust from being sued or challenged.
However, in a family law context, the efficiency of a trust as an effective asset protection tool is not as certain, especially now, when the new Family Law Act came into force. The new act extended property rights and their division to common-law relationships. It also introduced an excluded property regime, which increases the uncertainty as to which property is subject to division, including interests under the trusts.
Avoiding compulsory succession
In order to avoid wills variation claims under the WESA and restore the testamentary freedom the inter vivos trusts can be used: person settles a trust for the benefit of all persons to whom he or she wishes to distribute the estate. Since there is no will, provisions in relation to its variation do not apply. Unhappy children and spouses may try to challenge the transfer to the trust as avoidance of the wills variation provisions, however, the courts usually refrain from varying trusts.
Providing for the disabled
In order to be entitled to receive provincial disability benefits a disabled person should receive a certain amount of income and if the entire asset is transferred to the disabled person outright, he or she may not qualify. Trusts are often used to provide for the disabled, they can be structured so that not to disentitle the disabled person from receiving provincial disability benefits. The benefits are not necessarily monetary, they include access to programs and services that can be invaluable, and thus, it is important to retain their use.