With the aging population in Canada, many farmers and other business people are nearing retirement and firming up their estate and succession plans. People want to ensure that their hard-earned assets, including their businesses, will be protected both today and in the future. They also want to have enough funds to live the retirement lifestyle of their choice. And, they want to ensure that when they are gone their estate ends up in the hands of their loved ones â€" and not the taxman.
In our April 2007 article we talked about some benefits of using testamentary or will trusts in estate planning. Now, we'll turn to the other major category, inter vivos or living trusts.
Inter vivos trusts take effect while you are alive as soon as you, as the â€œsettlor,â€ move assets into the trust. Testamentary trusts are set up in your will and take effect only upon your death.
Simply put, a trust arrangement lays out the obligations of the trustee, who holds legal title to the property of the trust and manages the trust according to your wishes for the benefit of specified parties known as beneficiaries. The detailed terms of the trust are laid out in a written document called a trust deed or agreement.
Inter vivos family trusts can provide a number of estate and succession planning opportunities you might find appealing, including:
Â· The ability to reduce probate fees when your will is processed by removing some assets from your estate.
Â· The means to carry out an â€œestate freezeâ€ to limit final taxes on your estate by shifting the future increase in the value of assets, such as corporate shares in your business, to other family members by transferring these assets to the trust.
Â· The ability to maintain control of assets you have set aside for your children while they benefit from those assets. (These children could be minors or incapacitated and legally or otherwise unable to manage assets.)
Â· An opportunity to split income with your spouse/partner and other family members and thereby reduce your overall tax bill.
Â· A way to protect your assets from creditors.
In provinces where probate fees are as high as 1.5% of the total estate value, costs can be substantial. There are two special inter vivos trusts whose key purpose is to reduce probate fees: the â€œalter egoâ€ trust and the â€œjoint spousal/common law partnerâ€ trust.
You need to be at least 65 years of age and a resident of Canada to set up one of these trusts, and the trust income and capital must be solely for your benefit (or the benefit of you and your partner in the case of a joint partner trust).
When you transfer your property to one of these trusts the taxes on accrued capital gains will be deferred until the earlier of your death or the disposition of the property. This is a notable exception, since capital property transferred to other types of inter vivos trusts requires the transferor to declare any accrued gains on such property.
You will continue to pay tax on the income from the property during your lifetime. When you die, the property will move directly to your beneficiary and, because the property does not form part of your estate, there will be no probate fees on it.
The long delays common with probate also will be eliminated, so distributions to beneficiaries can be expedited.
The alter ego and joint partner trusts can provide other benefits. For example, they can serve as a substitute for a will. Upon your death, assets in the trust will be distributed based on the instructions in the trust. Because trusts are confidential, while wills can become public, this might be a good option if you wish to ensure privacy regarding dispersal of your assets.
Alter ego or joint partner trusts can be used to ensure the continuous management of your assets in the event of your incapacity. The trust can replace a power of attorney, and the terms of the trust will survive your death and that of your partner.
Inter vivos trusts are well worth considering as an estate and tax planning tool, but you should talk to your tax expert and a lawyer who knows trusts to ensure they make sense for your situation. There are legal, accounting and tax reporting costs associated with trusts and many legal and tax complexities in structuring them to achieve your estate planning goals.