Life Interest Trusts
As their name suggests, life interest trusts create interests in assets to be enjoyed by beneficiaries during their lifetime. The original beneficiaries during their lifetime (settlor, one or both spouses) of these trusts should be the only ones entitled to receive all income or get the use of the capital of the trust. These trusts are usually put in place for other than tax considerations and generally tax neutral. They are commonly used in estate planning.
There are spousal, alter ego and joint spousal trusts:
- Spousal or common-law partner trust is a trust for the exclusive benefit of the taxpayer’s spouse. Though a spousal trust may be created during the life of a spouse transferring assets into the trust, they are usually created under a will as Testamentary Trusts. Properly structured, they will provide for spouses during their lives and ensure desired distribution after their death;
- Alter Ego trusts may be created by individuals of 65 and older for their own benefit, mostly to protect the assets and avoid variation of desired distribution on death;
- Joint spousal trusts are created by individuals who are 65 and older for the benefit of the settlor and the settlor’s spouse. These trusts are commonly used by blended families, as it provides for both spouses during their lifetimes and ensures desired distribution after their death.
You can find additional information on our blog.
As for anything in life, there are benefits and drawbacks. While you are the only one who can decide whether to use them, Granville Law Group can advise you on the advantages and drawbacks, assist you in your analysis and decision making.
- Capital property can be contributed tax-free to these trusts (income tax), but real estate transfers may be subject to property transfer tax;
- Tax deferral to the time of death of the surviving spouse (spousal), settlor (alter ego) or last to die (joint spousal), but use of an alter ego or joint spousal trust may result in increased tax liability on death, as gains realized in the trust cannot be offset by losses or unused exemptions of the settlor or their spouse in their final returns;
- Protection from possible abuse by greedy relatives, but may be attacked by creditors;
- Capital may be left to residual beneficiaries of choice;
- Not subject to probate.