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Listen to Anticipating Issues in Trust Arrangements

This week on Hull on Estate and Succession Planning, Ian and Suzana discuss trust planning options and anticipating issues that may arise in the future.

Anticipating Issues in Trust Arrangements - Hull on Estate and Succession Planning Podcast #86

Posted on November 13^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #86 of our podcast on Tuesday, November 13^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  Good morning Ian, how are you?

Ian Hull:  I’m great.

Suzana Popovic-Montag:  That’s good.

Ian Hull:  We’ve had some interesting discussions about, at the end of the last podcast, we talked about sort of an interesting dovetail between tax and family law claims, and just talked about the capital gain and Family Law Act issues.  And one thing that we wanted to finish off with on that discussion, because we’ve been really talking about, you know, how these core tax issues do make such a big difference in estate planning.  And, you know, I would say in the context of estates administration, there are two of the most fundamental issues:  one is the tax issue; and the other is, of course, what does the surviving spouse have, in terms of rights, that will screw up the deal, so to speak, screw up the plan that you’ve already done.  And one of the points that we don’t want to forget is that when we do draft our Wills, that we need to consider as well the possibility of the Family Law Act claims being made.  And that that will in turn accelerate the interest of the other beneficiaries under the Will, should an election occur.  So there may be a tax consequence when someone says the Will’s not good enough for me.  The surviving spouse says, the Will’s not good enough for me, I want to elect under the Family Law Act.  That may have a ripple effect on all the other beneficiaries, so we can anticipate that and sometimes plan around that.

Suzana Popovic-Montag:  And anticipating it really is the key, I think, because we try to create these plans and we call them as bullet-proof as we possibly can.  But the reality is that things can get frustrated, those intentions can fall to the wayside, and the FLA election is the prime example of that.  And in those cases, there’s an unexpected result that arises.  And so you try, to the extent that you can, to anticipate what the diminished value of the estate is going to be in those kinds of circumstances.  And what you do in light of the fact that the tax liability that you’re trying to so desperately avoid, might actually be accelerated as a result of what’s been done.

Ian Hull:  It’s so true, because we have the situation, the classic scenario where someone does elect under the Family Law Act and the remaining beneficiaries, and a lot of cases it’s the children, either of the first and/or second or both marriages, sit around the table and they go, wow, I got a lot less to spread around here now.  There may be tax issues you want to consider and there may be diminished beneficiaries that have other approaches they may want to take.  For example, maybe there is going to be…you can anticipate that there’s a possibility of an election, and there’s going to be a lot less money for the remaining beneficiaries, and you may want to anticipate, you know, how that will affect them personally in their individual circumstances.  So it’s just something to consider as we round off our discussion on the interplay between the family law and the tax issues.

Now, when we first started this sort of section of our podcasting, we talked about the fact that one of the core issues relating to estate planning is, of course, that we would want to consider setting up a spousal trust.  And we’ve talked a lot about the spousal trust.  We’ve put a lot of emphasis in the past few podcasts on the rights of the spouse.  There is, of course, the secondary part of that.  And that is, a testamentary trust.  And we’ve already talked a little bit about what that is.  But I think we should spend some time talking more through some of those issues.  Because you either are going to…if you’re going to set up a trust arrangement, you’re either going to set it up in a spousal trust arrangement, or you’re going to set it up in a testamentary trust arrangement, or both.  So let’s not forget what those are, and how some of the core tax issues reflect on that issue.

Suzana Popovic-Montag:  And just as a quick refresher point on that, a testamentary trust, of course, is a trust that arises by virtue of the terms of the Will.  And so it comes about and is created in a Will and it provides…the tax laws provide that testamentary trusts are actually taxed in the same manner as an individual is taxed under the Income Tax Act here in Canada.

Ian Hull:  So that’s the same manner as, of course, the marginal rates and the graduated rates that you would have, as opposed to an inter vivos trust.  So there’s sort of these three types of trusts.  There’s the inter vivos trust, which his typically, and we can broad stroke it a little bit, but it’s typically taxed at the highest marginal rate.  So while they’re good for some reasons, they’re not good for tax reasons sometimes.  And we’ve got the spousal trust, which we…the tax rate is the same as the testamentary, and that is, at the individual rate.  But we’ve talked a lot about, you know, it’s a very restrictive trust.  It only can apply to the spouse and you have to be so, so careful as to who enjoys the benefit of that trust.  And now this third trust and how it’s taxed is this graduated rate and what we will do typically in these trusts is create a series of beneficiaries in most cases.  We have options: include the spouse; include the first children of the marriage; include the second children of the marriage; whatever you think makes sense in your own individual circumstances.

Suzana Popovic-Montag:  And so in that case, you’re going to, I guess, anticipate having several testamentary trusts arising in the same Will, like you’re setting up, as you say, one for the spouse, for the children individually, in order to be able to capitalize on the tax advantages of that.

Ian Hull:  That’s right.  And we mentioned in a previous podcast this idea that you’d set up, and you could have numerous trusts.  It depends on your circumstances.  But let’s talk about the basic scenario.  You’ll have a surviving spouse, male or female, and you will have children surviving.  And if you have wealth that you want to put into a trust, as opposed to giving it to them outright, you will try to set up these two trusts.  And you often will put in the Wills, lots of estate planning techniques will say that $1.00 into each one, and the rest…and its up to the executors to decide, how much goes in the spousal, and how much goes in the testamentary.  So it gives lots of flexibility and it gives tremendous lifetime, ongoing protection for the good reasons that if you’re going to do a trust, exit.

Suzana Popovic-Montag:  And adding to that flexibility is the fact that the testamentary trust, the fiscal period for that trust, can actually be chosen by the executor and they can take into account what would be most beneficial for the beneficiaries of each trust in setting that fiscal period.

Ian Hull:  That’s right.  And there’s a technical twist that adds to that too, is that the trust beneficiary is deemed not to have received trust income until the very last day of that fiscal period of the trust.  So again, that’s another twist.  I mean, what…I guess that pushing out the time that the income is received, Suzana, where does that help the beneficiaries?

Suzana Popovic-Montag:  Well, what it does Ian, is that it defers the tax the year in which the individual beneficiary has to pay tax on that trust income.

Ian Hull:  Okay.  Well, now we’ve talked about this idea of multiple trusts.  And let’s talk about multiple testamentary trusts, where there are two or more trusts that are created, and income is accruing to the same say, group of beneficiaries, or as we sometimes describe, the class of beneficiaries.  What sort of, again, what kind of creative advantages do we get under the Income Tax Act and those scenarios, where we’ve got that kind of situation?

Suzana Popovic-Montag:  In that kind of scenario, Ian, the trust can actually be designated as one for tax purposes.  So, notwithstanding that there’s more than one, it can be merged together, so to speak, so that it’s treated as one in order to be taxed.

Ian Hull:  Okay.  So I think that, you know, it’s a good lesson for us to make sure that when we create these trusts, we want to be careful when we draft them because generally, separate trusts for each child or grandchild, for example, will be taxed separately.  And, you know, it’s not the purpose of this podcast to get into graduated rates and the like, but you can see just from the basic math, it would be, sometimes, depending on your situation, it might be more advantageous to separate these trusts, especially when you have a significant amount of wealth.  You might want to set up the Betty trust and set up the John Trust and then set up the Great Grandchildren’s Trust, all thereby allowing different treatment of the tax on the income.  And, you know, as I say, it…so much depends on the individual circumstances.  But its worth considering.

Suzana Popovic-Montag:  And adding to that flexibility, the testamentary trust, you can take all or part of the trust income that is paid or payable to the beneficiary, and it can be taxed either directly in the trust, or into the hands of the beneficiary.  And that’s a little bit of an interesting twist that the executors can use to protect, or to the benefit of, the beneficiaries.

Ian Hull:  That’s right.  And there’s no attribution of income in those scenarios.  And again, I mean, we want to look at the Act, as this is…a lot of these rules are tied into Section 104 of the Income Tax Act.  And that particular example you gave is 104(13).1.  But, you know, these testamentary trusts that extend over a period of years, which we are presumably going to set up when we have it for minor children and grandchildren, really can result in significant tax savings.

Suzana Popovic-Montag:  The testator may also want to consider, when they’re creating their Wills or their plans, if the income-splitting trusts for their children or grandchildren, is something that they want to consider, if it’s something that’s appropriate, rather than perhaps giving 100% outright gifts to the children or the grandchildren.

Ian Hull:  That’s so true.  And I think that’s a good, sort of, final point to consider here, as we’re talking through this.  You know, we’re getting a good idea of how to do this, some of the flexibilities of the various trusts we want to set up in the testamentary context.  But, again, we want to, I think, sit back and take a deep breath and decide what we’re doing here, and looking at the kind of wealth that would be involved.  And, first of all, ask yourself the first question is, is there enough money to make these trusts make sense?  Is…does it make economic sense to be filing tax returns every year and to go through the professional headaches that you’re going to have to do, hire an accountant and probably a lawyer at some point, to administer all of this money.  So you’ve got to have enough wealth to make that make sense.  And then you need to sit back and say, okay, well, would it make sense just to simply give some of this money outright to children.  And especially if they are adult children, you know, it maybe make sense to give them some money in that they could use it for a down payment on a house, as opposed to pouring it into what can be an elaborate trust arrangement.  So, like you say, we need to sit back, look at what we’re doing here before we dive into some of these, what can be, complex trust scenarios, because the economics of it may not make sense.

Suzana Popovic-Montag:  And it really does become a balancing act in those situations, I think Ian, between, you know, is there enough, as you say, money to justify doing that in light of the benefits of it.  You know, knowing the creditor protections that may be available, the fact that you’re delaying a payment to perhaps minors who are not necessarily ready to be coming into a large amount of cash.  Those kinds of situations are all weighed against each other in deciding if this is the right arrangement for you and for your estate.

Ian Hull:  For sure.  Well, that’s great.  I think we still have lots to consider in the context of the testamentary trusts and I don’t want to cut it short but we’re coming up to our time.  And I think we’ll continue on with this discussion and consideration of how we can use testamentary trusts in our next podcast.  Thanks very much, Suzana.

Suzana Popovic-Montag:  Thanks to you, Ian, and I’ll look forward to our next podcast.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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Listen to Inter Vivos and Principal Residence Trusts

This week on Hull on Estate and Succession Planning, Ian and Suzana talk about Inter Vivos and Principal Residence Trusts as effective tools to consider when tax planning a will.

Inter Vivos and Principal Residence Trusts - Hull on Estate and Succession Planning Podcast #83

Posted on October 23^rd, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #83 of our podcast on Tuesday, October 23^rd, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  Hi there Ian.  How are you today?

Ian Hull:  I’m fantastic.  Just coming off…I had a late night last night on a mediation and I tell you, it was a great experience as often they are.  I was advocating instead of mediating, which you and I do together most of our mediation time.  But we were…it was interesting.  It was in front of a sitting judge who chose to case conference.  It took a whole day but it was a great reminder to me as we turn to our topics today about tax planning Wills and looking at the sort of core planning issues.  It was a great reminder to me that as much as you want to try to plan and organize your estate, the human dynamic is a big, big part of life after death, so to speak, for your beneficiaries.  I learned a couple of really important lessons again and they were lessons that I’d heard before and experienced before, but they were great lessons.  One was that because it was a sitting judge, we were able to get the perspective of a sitting judge in terms of how this might unfold.  And you and I, of course, mediate a lot of cases with retired judges.  I haven’t done a lot with sitting judges for awhile and it was fascinating to get that perspective, so that was number 1 that I learned a lot from.  And then secondly was what really surprised me really at the end of the day was the whole dynamic of a mediation generally.  But anyway, it was a good experience.

Suzana Popovic-Montag:  I think those situations, especially when you have a sitting judge, resonates so much Ian, with both counsel and the clients.  It just seems that it adds a whole layer that, using a retired judge for instance, or some other person who isn’t…doesn’t have that kind of credibility associated with it.  It’s a very different kind of situation.

Ian Hull:  It really is and, you know, it’s a good reminder that, as I say, we sit down, we want to plan our estates, we want to keep our eye on the ball on the tax issues and the planning issues that we were sort of keeping focused on in our mini-series we’re doing now.  But I was really surprised at how the non-legal parts of it played out in this particular mediation, not different much than most mediations, but still surprised nonetheless that, you know, the non-legal issues really prevailed, the emotional issues between, this was a fight between two brothers over an estate.  But one of the things that struck me about the middle of the mediation was that we started to talk about a solution.  And one of the solutions was to create a new trust.  And in this case that I was mediating there was a situation where a testamentary trust was established.  But there was talk about trying to resolve it by creating a new trust, an inter vivos trust.  And I sort of took a deep breath and thought about it and as we were working through some of the scenarios and so on, I thought, you know, gee, it’s a good thing that, from our perspective, we, you know, have done a lot of the leg work on these inter vivos trusts and looking at how they can be an effective tool because when you’re under the hot lights of a mediation, you don’t have time to learn the product, so to speak.  So we turned to it pretty quickly.  And one of the first things we talked about was that inter vivos trusts can, of course, be an effective tool in avoiding the estate administration tax that is payable on death if the assets side in the estate itself.

Suzana Popovic-Montag:  Another thing that I would think, you know, when you deal with these kinds of inter vivos trust arrangements, you want to…I certainly try to remember the fact that, you know, as soon as you start transferring assets into a trust, that’s going to effectively lead to a deemed realization of the property that’s transferred into it at fair market value.  And that’s something that I just try to keep in mind because, you know, it’s easy to say I’m going to set up a trust but there still are tax consequences associated with that.

Ian Hull:  For sure, and just another sort of lesson that we came out of at the last mediation that I was involved with was, that was the first question that I asked as we were starting to consider this, is that in that case, the estate had fallen in.  The person had died and we were thinking about establishing with some of the money that was in this estate, this inter vivos trust.  And the first question I asked was, have the deemed disposition taxes been paid on the estate?  And fortunately in that case, they had.  But it is a very important starting point that you realize that whenever you create these trusts, the tax is payable on the transfer.

One of the twists that we can’t forget with our clients, which I try to make sure I tell my clients to consider in the inter vivos trust environment, is to create a principal residence trust.  And that is a trust really that helps us deal with an isolated asset being the home.  And in Canada, we are blessed with no tax payable on principal residence but if you want to put your principal residence in a trust, you can do it, if properly drafted, into a principal residence trust and the taxing authorities, Canada Revenue Agency, won’t treat it as a special asset and they’ll treat it as a principal residence in terms of the tax payable on it when you both put it in and take it out.  And that’s a very important option.  And it’s an estate planning option that I like to run by my clients because sometimes, for example, you have a younger child who…maybe not younger but maybe they’re in their twenties and you don’t want to pass on the asset directly or give someone the asset directly without letting them enjoy the benefit of a non-taxable growth in the principal residence.  But at the other end of the day, you also may want to add some protections to that home and where it goes and how it gets out of.  And one example I think of is that in another matter that I was involved with, what we did was we created in an inter vivos trust, the principal residence trust, we created a pool of money to be put into the principal residence trust and the trust provision said that the money in this trust may, not has to, may be used to buy a principal residence.  And what they did in that case was they used…they put $1,000,000 in that trust and they used $700,000 of it to buy the principal residence and they kept the rest to help with the expenses.  So this podcast isn’t about how to draft principal residence trusts but it is a planning tool in the inter vivos world, inter vivos trust world that can be very effective.

Suzana Popovic-Montag:  That also brings to mind the possibility of other kinds of trusts in addition to that.  Like, I know you’ve talked a lot about in the past joint partner trusts and alter ego trust arrangements as well.

Ian Hull:  Yeah, and they are a really important tool.  In Canada, they certainly changed the landscape fairly dramatically and I think both the alter ego trusts and the joint partner trusts justify a special podcast in a sense.  We have talked about them in the past but I’m going to make a note that we want to come back to that issue because it’s an important planning issue, but one that, for the purposes of this…today’s podcast, I think we need to sort of more or less gloss over in the sense that we don’t want to get too…we want to try to cover the general concept of an inter vivos trust.  But the alter ego trusts and the joint partner trusts are again inter vivos trust planning that are set up to essentially allow you to transfer assets into a trust and not get stung with the deemed disposition.  And we go back to first principles.  As we said, the inter vivos trust is a deemed disposition the minute you put an asset into the trust.  So if you have an asset that has been growing that you haven’t paid the tax on the capital gains yet and you decide to put that asset into a trust, that instant there’s deemed disposition tax payable.  Now, with an alter ego trust or a joint partner trust properly drafted, you can avoid that deemed disposition because of the special rules around it.  And one of the core special rules, without getting in too much detail, one of the core special rules for these two special trusts are that to enjoy the lack of being taxed, so to speak is, is that you have to be age 65 or over.  So they are only established for a very, you know, specific market, so to speak.

Okay, those two, as I say, I’ve made a note because I think there’s really a lot there to consider, but we’re going to come back to those trusts from a planning standpoint.  And in fact, you know, I’m going to make another note and say that we could probably have some more discussion on the principal residence trusts as well.  But let’s leave that for another day because that covers our sort of general comments on inter vivos trusts.

Just then to turn to one topic that we’re not going to have time today to cover entirely but the question of RRSPs is such a…it’s sort of the…it used to be the biggest planning issue that most Canadians deal with.  I mean, most Canadians who have pass on wealth, aren’t passing on massive amounts of wealth, they are passing on savings.  And one of the core savings that often lands in an estate is the RRSP.  And we’ll talk a little bit about what the general concept is, but we also know from a planning standpoint that that has to be one of the core areas to consider when we are sort of revisiting our Will plan from a tax perspective.  We used to…I mean, until the joint accounts issues flared up over the past 5 years, that now seems to be one of the core planning issues.  But until that happened, the RRSP was the dominant issue for most regular Canadians like you and I in terms of our savings, because that typically is the only pot that’s there.

Suzana Popovic-Montag:  And now recently with the RESPs, the Registered Education Savings Plans, those are things that are also coming into the mix, as well as, and we’ve talked about in previous podcasts, life insurance proceeds. All of those are other creative ways to sort of deal with the tax consequences of an estate plan.

Ian Hull:  So just…I’m just going to introduce the concept and then we’re going to work through it in some detail because of the importance of it in future…in the next podcasts.  But the concept again comes back to the whole idea that, you know, this whole idea that there’s a deemed disposition of the capital growth unless, and we talked about the inter vivos pure trust, it has to be…you have to pay the tax when you create the trust.  We talked about the idea that you can maybe avoid it with a principal residence trust.  You can probably avoid it…well certainly avoid it with the alter ego trust and the joint partner trust.  Well the same goes with deferring tax on RRSPs.  With RRSPs and RRIFs, what we’ve done from a planning standpoint and what we’re going to talk about in our next podcast is, is that what special treatments can we deal with with these investments to try to at least work around the impending doom…not death…the impending doom of a deemed disposition.  So I look forward to that topic and I appreciate your comments today too, Suzana.

Suzana Popovic-Montag:  Thanks very much Ian.  Speak to you soon.

Ian Hull:  Thanks a lot.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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