WILLING TO TRUST: The use of Trusts in Estate Planning

It is estimated that, over the next several years, assuming present life expectancies and relative economic calm, (notice I said “relative”) the Canadian Baby Boomers will inherit over 1 trillion dollars. And, by extension, the much smaller millennial generation will inherit even more. Particularly in larger estates, corporations and trusts are often used to avoid or defer various types of tax, and to organize more clearly the intentions of the testator.

In general terms, Ontario law recognizes three types of legal entities: the individual(you and me), the corporation (public or private, profit or non-profit) and the Trust. Again, in very general terms, Ontario Law recognizes two types of Trusts: Inter Vivos ( established during the lifetime of the person creating the trust) and Testamentary ( contained within the will of the person creating the trust and effective only upon their death). The person who creates the trust is called the Settlor; the person for whom the trust is created is called the Beneficiary; the person who manages the trust is called the Trustee.

In the case of larger estates, as well as the tax advantages, such as income-splitting between spouses, and flexibility of gifts to minors or persons with disabilities, the use of inter vivos trusts provide a framework for the management of the assets of the estate should one or both of the spouses become disabled or incompetent. Last, but certainly not least, since the inter vivos trust does not die, the assets held within it do not pass to beneficiaries on the death of the testator, thereby eliminating, or at least reducing, the Estate Administration Tax.

Inter vivos trusts are often set up in conjunction with a corporation or a series of corporations which ultimately flow the income, which would otherwise fall entirely into the hands of the individual, into the trust. The trust, like an individual or a corporation, is taxed both federally and provincially.

The Income Tax benefits, and pitfalls flowing from the establishment of an inter vivos trust are many, and must be discussed thoroughly with a tax accountant and tax lawyer. In this discussion, you will hear terms such as “ Alter Ego Trust”, “Joint Partner Trust” and “Self Benefit Trust”. These various vehicles facilitate the rearranging of assets between spouses and among children, before and after death. Great care must be taken in drafting these types of trust, since, unless the trust provides for amendment, its terms cannot be altered ( at least not very easily).

This is contrasted with the testamentary trust which takes its terms from the will of the testator and can be amended at any time prior to death. While there are definite tax and other advantages to rolling assets to a testamentary trust, Estate Administration Tax will apply to the value of any assets transferred.

The use of a “Henson Trust”, (or Absolute Discretionary Trust) may be helpful in the case of an estate, a portion of which will pass to a beneficiary with a disability. The way this type of testamentary trust works is as follows: the estate trustees are instructed not to transfer the inheritance of the person with the disability to him. In fact, the estate trustees are told that they have total discretion whether or not to pay anything to the beneficiary. Sounds cruel doesn’t it? Not really. In separate documents the trustees are told to provide adequately for the needs and care of the individual, but are given the flexibility so as to avoid interference with other sources of income of the beneficiary.

In summary, the use of inter vivos trusts and testamentary trusts can be beneficial in many types of estates, particularly large or complex ones, and estates involving persons with special needs, as part of a comprehensive estate plan.