A trust is an equitable obligation binding a person, who is called a trustee, to deal with property over which he or she has control for the benefit of persons called beneficiaries.
The person creating the trust is called the “Settlor”, the person who holds title to and controls the property is called the “Trustee”and the person for whom the trust is being held is called the “Beneficiary”.
A trust can be created by a written document, called an express trust,or it can be created by implication, called an implied trust.
A trust is usually created by:
- A written trust document created by the settlor and signed by both the settlor and the trustees (often referred to as an i nter vivos or “living trust”);
- an oral declaration;
- a will, also called a testamentary trust; or
- a court order (for example in family proceedings).
To be valid a trust requires three certainties:
- There must be a clear intentionto create a trust;
- The subject matterof the trust must be clearly identified; and
- The beneficiaries (objects) of the trust must be clearly identified, or be ascertainable.
The use of trusts can afford the estate planner the following benefits:
- Centralized ownership and management of assets;
- Flexibility in determining the future method of wealth distribution;
- Enhanced asset protection from third party claims;
- Increased privacy; and
- Potential avoidance of probate procedure and probate claims.
There are numerous types of trusts used for estate planning purposes, including but not limited to:
- Spousal/Common-Law Partner Trusts
- Alter Ego Trusts and Joint Partner Trusts
- Multiple Testamentary Trusts
- Special Needs Trusts
SPOUSAL/COMMON-LAW PARTNER TRUSTS
A spousal trust is a trust under the terms of which the settlor’s spouse will receive all income of the trust during his or her lifetime and no one other than the spouse can obtain any income or capital of the trust during the spouse’s lifetime. The settlor and the trust must be resident in Canada at the time of the transfer. Spousal/Common-law partner trusts can be created either as inter vivos trusts (between living persons) or as testamentary trusts (in a will).
A benefit of a spousal trust is that it permits the deferral of taxable capital gains, allowable capital losses, recaptures of capital cost allowance and terminal losses until after the spouse has died. Further, a spousal testamentary trust can have an off-calendar taxation year and has the advantage of paying tax at the usual marginal rates applicable to individuals.
Spousal/Common-law partner trusts also have the advantage of avoiding probate fees and probate/administration delays since the assets would be held in trust, rather than being part of the estate of the deceased.
ALTER EGO AND JOINT PARTNER TRUSTS
An alter ego trust is a trust created during the settlor’s lifetime after the age of 65, under which the settlor is entitled to receive all of the income of the trust for the balance of the settlor’s life. No person other than the settlor is entitled to receive or otherwise obtain the use of any of the income or capital of the trust prior to the settlor’s death. A settlor can transfer property to an alter ego trust on a rollover (tax deferred) basis. However, on the death of the settlor that settled it, an alter ego trust will be deemed to have disposed of any property it holds.
Joint partner trusts are similar to alter ego trusts except that they are created by married/common-law spouses and the trust is deemed to have disposed of property it holds on the last to die of the spouses.
Alter ego and joint partner trusts can serve as an alternate for a will. These trusts avoid payment of probate fees on the assets in the trust because the assets are not included in the estate of the deceased. Further, these trusts can potentially serve as substitutes for powers of attorney and as mechanisms for creditor protection.
MULTIPLE TESTAMENTARY TRUSTS
Wills with multiple testamentary trusts can serve to minimize taxes. A testamentary trust, a trust or estate which arises on the death of an individual and as a consequence of that death, includes a trust created under the terms of a will. One of the major differences between an inter vivos trust (a trust created during someone’s lifetime) and a testamentary trust is that the income of the former is subject to tax at the highest marginal rate, while a testamentary trust is subject to tax at the graduated tax rates applicable to natural persons.
Specifically, testamentary trusts are taxed according to the same progressive marginal tax rates applicable to natural individuals. Therefore, just as two (or more) individuals earning a certain income will pay less tax thereon than one individual earning the same amount, the same logic applies to testamentary trusts.
The taxation year of a testamentary trust is generally the trust’s fiscal period, not exceeding 12 months in duration, which need not coincide with the calendar year. A testamentary trust is not required to make installments of tax and instead can pay tax within 90 days after the end of its taxation year.
The status of a trust as a testamentary trust, and the resulting application of graduated tax rates, provides the potential for income-splitting between the trust and its beneficiaries. For example, a testamentary trust whose beneficiaries are taxed at a higher marginal rate can take advantage of the trust’s lower marginal rate by using paragraph 104(6)(b) of the Income Tax Act to deduct from the trust’s income only part, or none, of the amounts that are payable to its beneficiaries. The trust would then designate the remaining part of the income payable to its beneficiaries (i.e., the undeducted part) under either subsection 104(13.1) or 104(13.2), which would result in that part of the income being deemed not to be payable to the beneficiaries. That part would therefore be taxed in the trust at the trust’s lower tax rate, instead of at the beneficiaries’ higher tax rates.
SPECIAL NEEDS TRUSTS
In BC, if a disabled person has either income or assets in excess of prescribed limits, the person will lose the benefits and services that would otherwise be available to them under Employment and Assistance for Persons with Disabilities Act . Disabled persons are permitted:
- $3000 for a single person with no dependants;
- A person who has a dependant is allowed a maximum of $5000;
- A $400 earning exemption per family per month;
- Clothing and necessary household equipment;
- One motor vehicle;
- A primary residence;
- Money received from a mortgage or the sale of the residence as long as the money is used to buy a new home or to pay rent on a place of residence;
- Tax credits and income tax refunds; and
- Government settlements for example: compensation for thalidomide victims and Hepatitis C victims.
Accordingly, being a beneficiary of an estate may cause a disabled person to lose the free government services and benefits to which the person would otherwise be entitled.
If a disabled person is a beneficiary of properly drafted discretionary trust in a will, the beneficiary will not lose access to government services or benefits. Because the beneficiary of a discretionary trust has no right to demand any of the income or capital of the trust, the person cannot be considered to own any of the trust property or to be entitled to any of the trust income. Only the amounts actually distributed out of such a trust to a disabled person will be included in the disabled person’s assets and income in determining whether the disabled person is entitled to government services and benefits.
The trustee who holds discretionary power over the income and property of a discretionary trust can make sure that the income and capital distributed out of the trust to a disabled beneficiary will not result in the beneficiary’s income or assets exceeding the prescribed limits so the beneficiary will not lose access to government benefits or services.
Money can be spent by a trustee on the following without a deduction to the beneficiary’s monthly disability benefits:
- Medical aids or supplies;
- Education or training;
- Home renovations required to make the residence more accessible for the beneficiary;
- Home maintenance and repairs;
- Home support and caregiver services; and
- An annual limit of $5,484 towards independent living.
If proper estate planning has not occurred or the disabled person receives a lump sum payment, such as from an accident settlement, a non-discretionary trust can be set up. A non-discretionary trust is a trust where the beneficiary has control over the trust spending decisions. There is a limit of $100,000 which can be put into a non-discretionary trust without affecting disability benefits. The Ministry of Employment and Income Assistance (MEIA) may permit more by special approval only. The trustees must ensure that the beneficiary spends the income generated by the trust so that the lifetime capital amount of $100,000 is never exceeded.
