Estate Planning Checklist (Part 2 – Trusts)

Do you want to give some of your estate away today during your lifetime by way of a living trust to those who are entitled to benefit from it, your beneficiaries, such as family, friends, and/or charity, while you still have legal control of those assets? Yes/No

 

Living Trusts set up during your lifetime – Pros

  • Providing For Beneficiaries Who Can’t Manage Assets On Their Own – You can provide for dependants with special needs, beneficiaries of a complicated estate who don’t have the expertise to manage it, management of a minor’s inheritance to be received in a lump sum when he or she reaches 18 by spacing it out, with a living trust.
  • Providing For Yourself And Your Spouse If Too Old Or Sick – You can provide for yourself, or you and your spouse, during your lifetime with a living trust called an Alter-Ego Trust, or Joint Spousal Trust, respectively, allowing legal control of those assets in the trust to rest with a trustee, who manages the property in advance of your or your spouse’s death or disability, thus acting as a power of attorney – you must be 65 years of age to set up this trust.
  • Second Marriages – You can provide for your spouse from a subsequent marriage during his or her lifetime with a living trust called a Spousal Trust, after which the assets from the trust pass to the children of your first marriage.
  • Estate Freezes – If you own an investment (other than your home) or a business that has grown in value over the years and will continue to grow, you can pass the future growth to the hands of your beneficiaries now, and still maintain control, by way of a living trust that owns a corporation, which allows you to establish or “freeze” your taxes on that growth now, but pay those taxes later when you die, thus reducing a potentially higher tax bill if you waited to transfer your growing assets when you died.
  • When investments are transferred to a trust by the settlor they are transferred at fair market value, so any gain on the growth of those investments are taxed in the hands of the settlor when the transfer occurs, however, this tax is deferred for Spousal, Joint Spousal, Alter-Ego living trusts, and for transfers to corporations for estate freezing purposes.
  • My first checklist on estate planning explained that in addition to the advantage of control and management offered by a trust, assets held in a trust are protected as they are owned by the trust and are not accessible to creditors of an individual.
  • There is no probate or estate administration fees on the assets held in a trust, as the assets pass outside of your will via the trust document (see my first checklist for the probate fee rates).
  • The trust document remains confidential, whereas a will becomes a public document if it is probated, disclosing the value of the estate as well to the public.

 

Living Trusts set up during your lifetime – Cons

 

  • Accounting fees for annual preparation of the trust tax return and financial statements of the trust, legal costs to prepare the trust document, however, accounting and legal fees are tax deductible by the trust.
  • The living trust is a separate person under our tax law, and pays tax on its income at the highest marginal tax rate, however, the trustee can pay, or make payable, the income of the trust to beneficiaries with lower marginal tax rates, thus avoiding the high tax by the trust.

 

2. Do you want to give some of your estate away by way of a testamentary trust that is set up under your will and comes into effect when you die? Yes/No

 

Testamentary Trusts – Pros

 

  • Providing For Spouse and Children In the Event Spouse Remarries – You can provide for your surviving spouse and preserve the assets for your children if your spouse remarries using a Spousal testamentary trust.
  • Providing For Beneficiaries Who Can’t Manage Assets On Their Own – You can provide for dependants with special needs, beneficiaries such as your spouse of a complicated estate who don’t have the expertise to manage it, management of a minor’s inheritance to be received in a lump sum at 18 by spacing it out.

 

Testamentary Trusts – Cons

 

  • Accounting fees for annual preparation of the trust tax return and financial statements of the trust, legal costs to prepare the trust document, however, accounting and legal fees are tax deductible by the trust.
  • The testamentary trust is a separate person under our tax law, and under the new recent rules, pays tax on its income at the highest marginal tax rate like a living trust (with the exception of the first three years after the settlor’s death, in which case graduated marginal tax rates still apply to the testamentary trust), however, the trustee can pay, or make payable, income of the trust to beneficiaries with lower marginal tax rates, thus avoiding the high tax by the trust.

 

A Cautionary Word about “Henson” Trusts

 

  • A “Henson” Trust can be a living (set up while you are living) or testamentary trust (comes into effect when you die).
  • In either case, you can use a Henson Trust to provide for a beneficiary who is physically or mentally disabled with investments you transfer into it, plus the beneficiary may be eligible to get additional funds and assistance from the Ontario Disability Support Program (“ODSP”) since he or she does not have an “enforceable right” to the trust (the “hallmark” of a Henson trust), thus the trust is not considered an “asset” affecting his or her eligibility for disability support programs.
  • A word of caution about transferring investments into a Henson Trust to potentially obtain the additional support funding offered by the ODSP: When investments are transferred to a Henson Trust by the settlor they are transferred at fair market value, so any gain on the growth of those investments are taxed in the hands of the settlor when the transfer occurs, so the tax consequences should be carefully weighed against the potential government benefits to be received.

 

Stay tuned…..

My next newsletter will continue the Estate Planning Checklist and discuss U.S. Estate and Gift Taxes … did you know that you could be subject to U.S. Estate Tax even if you are a Canadian resident, Canadian citizen, and have never set foot in the U.S.?!

 

Notice to Reader

 

Dean Constand CPA CGA publishes this newsletter for information purposes only. Feel free to distribute to colleagues and friends. Although the material has been carefully prepared, it is not a substitute for professional advice.