A Matter 0f Trust
Jim Bird, CFP, CLU, CH.F.C., FLMI, J.D., LL.B.,TEP
Regional Tax & Estate Planning Consultant
Burlington, Ontario
Estate Planning Principles
• Protect and control assets
• Maintain flexibility
• Retirement plan
• Succession plan - who takes over,
when under what circumstances
Estate Planning Principles
re: Taxes
•
•
•
•
Save or defer taxes and probate fees
Pay tax at lowest marginal tax rate
Fully utilize capital gain exemptions
Take advantage of any “rollovers”
Estate Tax Issues
• Capital gains taxes arising
on death
• Recapture of depreciation
• Taxation of registered
funds
• Probate fees
Probate Fees (Ontario)
•
•
•
•
.5% on first $50,000
1.5% on rest
Levied on the “Value of Estate”
Exemption provided on court form:
• Insurance payable to a named beneficiary, or
assigned for value
• assets held on joint account and passing by
survivorship
• real estate situated out of Ontario
Probate Fees (Ontario)
Letters Probate will be required in the
following situations:
•
•
•
•
Estate is involved in litigation
Minor children are beneficiaries
Real property is to be transferred
Assets in a bank or financial institution are greater
than $10,000 - $15,000
• Publicly traded shares or Canada Savings Bonds are
to be transferred
Multiple Wills
• Possible method to reduce probate fees
• Useful for shareholders of private
companies
• Can be used to avoid probate on value of
private company
Trusts
•
Created during life (“inter vivos”) or at
death (“testamentary”)
• Trust Uses:
1. Family Trust
2. Spousal (new term “Partner”)
3. Alter-ego/Joint Partner
4. Insurance Trust
5. Trust for Minor or Disabled
What is a Trust?
Settlor
Beneficiaries
Trustee
Components of a Trust
• Settlor - creator or transferor
• Trustee - holds legal title
• Beneficiaries - entitled to use or enjoyment
• income/life
• capital/residual
• Corpus - trust property
• Terms - establish specific rules for duties and
operation
Trusts - Benefits
•
•
•
•
•
•
Transfer ownership but retain control
Flexibility
Confidentiality
Creditor protection
Minors and disabled adults cared for
Useful in tax/probate planning
How are trusts taxed?
• Disposition of property on the way in
• Except…spousal and alter ego
• Separate taxpayer - separate tax return
• Testamentary trusts are taxed like individuals
• Inter vivos trusts are taxed at a flat rate - the highest
marginal rate
• Taxed on income from trust property
• Deduction for income paid or payable to a beneficiary
How are trusts taxed?
• Flow through character of income
• Deemed disposition of capital property
every 21 years
• Life Insurance is not capital property
• Distribution of trust property to a capital
beneficiary at “cost amount”
• Except…spousal and alter ego
• Attribution
1. Family Trust
• Transferring future growth in the family
business (often part of an estate freeze)
• Income splitting (kiddie tax)
• Capital gains exemption multiplication
• 21 years and roll out
Family Trusts
• Common Question
• Kiddie Tax - is family trust still useful?
• Common Answer
• CONTROL; FLEXIBLE DISTRIBUTION; ASSET
PROTECTION; CREDITOR PROTECTION…..
• Income split with adults (over 18)
• capital gains split with minors
2. Partner (Spousal) Trust
Why do we use them?
• CONTROL OVER ASSETS
• spendthrift spouse
• preserve assets for children
• second marriages
• TAX ADVANTAGES
• tax-deferred transfer of assets
• no 21 year rule
• deemed disposition on 2nd death
Partner (Spousal) Trust
• Common Issues
• income must be paid/payable to spouse
• spouse does not have to take income
• EXCLUDES CAPITAL DIVIDENDS RECEIVED
• capital can only be available to spouse during
lifetime
• doesn’t have to be available to spouse
• can’t be available to anyone else
Planning Opportunities with
Life Insurance
PROBLEM:
Dad
Dad
Dad
Dad
Dad
in 2nd marriage - married to Young Sex Kitten
owns shares of family business
wants to provide income to YSK
wants to preserve value of shares for his kids
doesn’t want to accelerate tax liability on shares
Planning Opportunities with
Life Insurance
What’s Dad to do?:
If leave shares to kids
• lose spousal rollover and accelerate tax
• what income is available for YSK?
• compliance with FLA
If leave shares to YSK
• get tax deferral
• no assurance YSK will leave them to kids
SOLUTION:
Life Insured Spousal Trust
Life Insured Spousal Trust
• Spousal trust to preserve shares for kids
• Life insurance in corporation to redeem
shares on YSK’s death
• dad freezes in favour of kids
• trust holds preferred shares of corporation
• corporation owns joint-second life insurance policy
• Redemption subject to stop-loss
Planning Opportunities with
Life Insurance
THE PLAN:
•establish spousal trust
•corporation purchases Life Insurance
•joint second on dad and sex-kitten
•minimal level coverage on each
•elect AV on first death
AV proceeds create CDA credit for corporation
If desired, corporation can redeem shares from
trust using capital dividends on first death
Planning Opportunities with
Life Insurance
• What have we Done?
• Avoided deemed disposition
on dad’s death
• Redeemed shares without
stop-loss rules
• Capital dividends not paid to
YSK - retained in trust for
kids
• Income from retained asset
payable to YSK
• Roll and Redeem
3. Alter Ego and Joint Partner
• Transferor must be at least 65 years old
• Only settlor or settlor and spouse can
receive income during lifetime
• Allowed to roll assets into the trust
• Inter vivos (taxed at highest rate)
• Eliminate probate fees
Top Ontario Marginal Tax Rates
on Investment Income 2004
Interest Income - 46.4%
Dividend Income - 31.3%
Capital Gains -
23.2%
Top Alberta Marginal Tax Rates
on Investment Income 2004
Interest Income - 39.0%
Dividend Income - 24.1%
Capital Gains -
19.5%
4. What is an Insurance Trust?
• An arrangement whereby the capital of
the trust is derived from the receipt of
insurance proceeds
When to use an
Insurance Trust:
1) To ensure life insurance proceeds
reach the hands of persons intended
2) To ensure insurance proceeds stay out
of the hands of persons not intended
to benefit
Life Insurance Trust
•
•
•
•
•
•
Separate testamentary trust
Income splitting opportunity
Avoids probate
Creditor protection
Orderly distribution
Flexibility
Life Insurance Trust
• Fred Creates by Will or by Separate Trust
Deed
• Fred Establishes terms
• capital paid to kids at 25 and 30
• power to encroach
• income distributed to kids each year
• income splitting opportunities - 3 taxpayers are
better than 1 (Trust, Pebbles, Wilma)
Minor Beneficiaries:
The Insurance Act (Ontario)
•
•
Insurance proceeds cannot be paid to
an individual prior to attaining the
age of majority
They have no legal capacity in
Ontario until age 18
Minor Beneficiaries
• Designate children as beneficiary to
avoid paying probate (Bare Trust)
• BUT result will be children will take all
at age of majority
• Trustee will have to go to court for
appointment and direction
• Cannot encroach on capital
5. Disabled Beneficiaries
• Ontario Disability Support Program
• is the child dependent on ODSP?
• will future employment preclude continued receipt?
• do they get disability income from another source
(CPP)?
• are they nearing age 65 … OAS/GIS will replace
ODSP?
• size of estate?
• ODSP include health benefits package
“Grandparented”
Recipients
• Lifetime exemption from review of the
medical health status of the individual
• Cancellation of ODSP requires the
individual to qualify in another category,
some may not (new definition appears to
be more restrictive)
ODSP Financial Eligibility
• If the individual has assets that exceed the
limits they risk ODSP cancellation or
suspension
Exempt Assets
•
•
•
•
principal residence
modified vehicle
$5,000 of assets
$100,000 (lifetime limit) in a trust from a
inheritance or life insurance proceeds
• discretionary trust (Henson Trust)
$100,000 Trust
• Funds may be left directly to a disabled
individual
• by will
• because a family did not have a will
• ODSP eligibility can continue if the funds
are held in trust and the total lifetime
amount does not exceed $100,000 (be
careful of accumulations)
$100,000 Trust
• The individual MUST establish a trust in
every case where the asset limit ($5,000)
would otherwise be exceeded, even if the
individual is capable of managing the
funds him/herself
• Trust bank account
• Cash surrender value of a life insurance
policy (annuities, GIA’s, segregated funds)
Discretionary “Henson”
Trust
• Tool to create a trust where no monetary limit
applies
• Testamentary discretionary trust: Trustee has
absolute discretion as to when and how much
money the individual would receive, must have
more than one beneficiary
• The court holds that this is not an asset of the
disabled beneficiary if properly structured
Discretionary Trust
• Income and capital do not vest in the
beneficiary
• Beneficiary can keep their government
benefits
• Trustees have authority to decide which
beneficiary gets income/capital and
amounts
Other Considerations
Trustee Attributes
• Knowledge and skill
• Cautions
• Determine expertise needed
• investments
• tax/legal
• family needs
• Is the estate large enough to hire
professional trustee
A Matter 0f Trust
Jim Bird, CFP, CLU, CH.F.C., FLMI, J.D., LL.B.,TEP
Regional Tax & Estate Planning Consultant
Burlington, Ontario