Testamentary Trusts
The Financialist • Issue 100 • January 2009
BY J. CHRISTOPHER MEYER LLB
By deciding to make a will, you can take advantage of the opportunity to decide how to dispose of your property upon death, subject of course to certain common law rules and legislation.
One of the useful tools that a person planning for the distribution of his or her estate can make use of is the testamentary trust. A testamentary trust is typically created in a will and only takes effect upon the person’s death.
The trust as a tool in a will is valuable for its flexibility. A trust can be designed in a way appropriate for almost any individual circumstances.
Typically, when dealing with electing how to disburse assets within a family, there are three categories of trusts one might come across; spousal trusts, accumulation trusts and Henson trusts.
A spousal trust can be used for a variety of reasons. Such trusts are often used to make the administration of estates more tax effective, as well as safeguarding some assets for the next generation. Where an estate may have a significant value to pass on, rather than leave the entire estate to the deceased’s spouse, it is sometimes quite effective to pass a portion of the estate directly to the spouse and use the rest to create a spousal trust with the spouse as a primary beneficiary and the subsequent beneficiaries as so named. The result is that the spouse receives two streams of income from the estate, each of them being subject to federal and provincial taxes on the graduated method as if two separate persons were paying the taxes. The result would be lower total taxes payable.
Spousal trusts are also useful in sheltering unrealized capital gains, further deferring the payment of taxes. Upon death, where there is a transfer of property to a surviving spouse, the taxes that arise will be deferred if the property vests in a spouse or spousal trust within 36 months of death. The applicable capital gain does not need to be declared until either the asset is sold or the surviving spouse dies. Only then will tax be paid.
On the death of the spouse who was the primary beneficiary, the remainder of the monies held can then pass in accordance with the provisions of the will. This structure is particularly useful where there is a “second family” involved. Where there has been a remarriage, the deceased might want to ensure that the surviving and current spouse is looked after during that person’s lifetime but ensure that whatever remains once that spouse passes flows, not solely to any children from the second marriage, but that an appropriate portion remains available to the children of the first marriage.
Spousal trusts are also used for non-tax reasons such as where the spouse is not considered competent to manage investments, or where the spouse is in need of asset protection.
Accumulation trusts are often set up by the person making the will so they can predetermine at what age and/or under what circumstances the deceased’s children may be able to make use of the income generated by and the capital contained within the trust. Generally, such trusts are designed where the person is concerned about a child’s capacity to make responsible choices with an immediate inheritance, whether it be they are too young, spend frivolously or are involved in a relationship where the person thinks the bequest might be at risk because of a possible separation/divorce. The trust can give the trustee discretion with respect to the distribution of the income and/or the capital, including setting threshold dates or events upon which payments can be made to the beneficiary. The most common example one might see is a trust that requires that the trustee pay to the beneficiary certain portions of the estate at certain ages such as 21, 25 or 30.
Henson trusts can play a vital role in helping a person protect any children with disabilities. Specifically, these trusts can be structured to ensure that the child’s eligibility for federal and provincial disability benefits is not affected by the bequest in a will. Depending on the value of the inheritance, if a lump-sum amount is distributed to a disabled child, that child may become disentitled to disability benefits for a significant period of time. The terms of the trust enable the trustee to distribute the property according to government guidelines so as to maximize the benefits available for the child whilst not affecting his or her eligibility for the disability benefits. For example, the trust may direct a trustee to pay for medical or health devices, care-giving services, education or training, maintenance of the child’s residence, and trips, etc. Structured appropriately, such payments do not affect the child’s benefits.
Anyone with assets who wishes to pass them on to loved ones with the least possible aggravation should have a will. When contemplating your will, you should always consider whether a trust is an appropriate tool for your family and your circumstances.
Christopher Meyer is a lawyer with Watson Goepel Maledy. The views expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no representation as to their completeness or accuracy. You should consult your own lawyer to discuss your personal situation.