Listen to Tracking Down Heirs
This week on Hull on Estates, Diane Vieira and Rick Bickhram discuss the issue of when an estate trustee is responsible to search for potential heirs to an estate.
Comments? Send us an email at hull.lawyers@gmail.com, call us on the comment line at 206-350-6636, or leave us a comment on the Hull on Estates blog.
This week on Hull on Estates and Succession Planning, Ian and Suzana discuss the question of compensation and complaints regarding compensation.
Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.
Listen to Developments in Will Changes.
This week on Hull on Estates, Ian and Suzana discuss developments in will changes. They reference cases from Key Developments in Estates and Trusts Law in Ontario ed. 2008.
Comments? Send us an email at hull.lawyers@gmail.com, call us on the comment line at 206-350-6636, or leave us a comment on the Hull on Estates blog.
Issues in Estate Administration: Tax Filing - Hull on Estate and Succession Planning Podcast #110
Suzana Popovic-Montag: Hi, and welcome to
Welcome to
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.
Suzana Popovic-Montag: Hi it’s Suzana Popovic-Montag.
Ian Hull: Ian Hull.
Suzana Popovic-Montag: And welcome to our podcast. We would just like to take this opportunity at the very beginning to remind you of the fact that we have a call in number for any of our listeners who have any comments on our podcast. Please feel free to call us at 206-457-1985.
Ian Hull: And also I encourage you to send us an e-mail at hullandhull@gmail.com or check out or daily blog which is easily found from our webpage at hullandhull.com. Well let’s start working through some issues on the estate administration.
Suzana Popovic-Montag: That’s great Ian, we shall, but I just wanted to take a quick opportunity to let our listeners know that by the time this podcast is up, you will have done yet another appearance on a great show that’s called “Strictly Legal”, that is hosted by Michael Cochrane and for people who are interested in hearing Ian speak about issues of Estate and Trust matters in a more general all encompassing fashion, I highly recommend you to that show.
Ian Hull: Well thanks Suzana, its fun, it’s a great show. I’m looking forward to it. It’s thrown up on a video stream after on Business News Network, BNN Network so, it’s good fun.
Suzana Popovic-Montag: Good for you Ian.
Ian Hull: Alright, so where we left off in our last podcast was we were still struggling through some tax stuff because it is tax time here in
Suzana Popovic-Montag: That’s for sure.
Ian Hull: So we mentioned the T1 terminal income tax return which is due and then we talked a little about how you dovetail in an interim distribution encouraging the party, the executors, I try to encourage my client, the executors. to get the money flowing as quickly as possible, knowing the restrictions that are out there, because there are some, we can’t just simply send it out. But as soon as is safe, send it out with sufficient holdback. One of the reasons for the holdback is, of course, we have to pay taxes.
Suzana Popovic-Montag: And in addition to the T1 terminal return an estate trustee is going to prepare annually a T3 estate tax return.
Ian Hull: And that’s on estates that are not immediately distributable, so that if the assets are generating income, or there is a trust that is ongoing, or you just didn’t get it filed, the estate administered in the first year, Revenue
Suzana Popovic-Montag: One of the other things that we suggest to our clients to keep in mind after these tax returns have been taken care of, is to consider and to confirm that all CPP death benefits, that’s the Canada Pension Plan death benefits, have in fact been received on behalf of the estate.
Ian Hull: And also here in
Suzana Popovic-Montag: That’s good advice, Ian.
Ian Hull: I think really at this point, I just want to take a deep breath and look back at what we are doing because, and this is where some clients, we meet some resistance from clients because they sort of see us as trying to cover off too much sometimes. But I really, I often at this point will sit down and prepare a comprehensive reporting letter. From our standpoint, for sure, we will report throughout. But this is a good time also for the beneficiaries to receive something in writing directly from the executor. There is nothing like personal contact, ongoing phone calls is a great idea as well. Just keeping people up to date, keeping the process personal. Because this is personal, this isn’t a business transaction, this is a life transaction. So I always encourage my clients who are executors to pick up the phone or grab a coffee with some of the beneficiaries or even have an informal meeting with them at the local coffee shop. But most importantly, I also suggest to them that they prepare a reporting letter.
Suzana Popovic-Montag: That is really good advice, Ian because it gives people then an opportunity to sort of see in writing all the hard work that you have done as an executor and the benefit of that, of course, being at the end of the day, when you want to seek compensation for your work as an estate trustee, you will have something to point the beneficiaries to in terms of the work and the hard effort that you have put forward in administering the estate.
Ian Hull: And it really is, it is not just self-serving, I think it is a natural reaction for people to, who feel that they are in the dark, no matter what you are dealing with, in business or, and in this case what is often a family situation. Dialogue and communication is so crucial and so the more, the better.
Suzana Popovic-Montag: And then just sort of to wrap up the tax discussion that we had we want to turn our minds to the final income tax return and the preparation of that final T3, and then, of course, applying for the final Clearance Certificate in order to give the sort of seal of approval to all the tax filings that have been done to the estate trustee on behalf of the estate.
Ian Hull: Okay, so let’s talk this through a little bit because this is really the final bell for the tax filings, and this final T3 return and the final Clearance Certificate application is so important. Again, I typically will tell my clients unless they are the tax experts that I am not, make sure you send everything to the accountant. This is the last chance to have sent all of the paper that you think might possibly relate to any of the assets of the estate to the accountant, let them decide what needs to be put to the taxing authority, not you.
Suzana Popovic-Montag: And then, of course, file the return, pay any taxes owing and just make note of the fact that you want to follow up the actual receipt of the Notice of Assessment for that final T3 return and typically that will come in about six to nine months.
Ian Hull: And then, of course, we have the second step and that is, of course, we will be looking for a Clearance Certificate. But one of the things that people talk about, and without getting overly technical on the tax side, is what do you do when you want to wind up an estate because interest is always going to be accumulating? And there is an easy answer, again not for my abilities to follow through on the mechanics, but the concept that: say there is a $100,000 left in the bank and you are holding that back to get your Clearance Certificate from CRA. You filed your final T3 return, everything is really ready to go but there is this one remaining amount of money that is being held back because the accountant said look, you know what, this is a busy account and this individual did a lot of transactions over his lifetime and CRA could always come back and look, and that final look at the Clearance Certificate time, because we have to remember CRA, that’s the last kick they are going to get at it too. So they typically take a pretty good, careful look at all of the tax activity of the deceased at that time. But what you can do is, you can allocate the interest income that is being accumulated on the stop date. So you, say you have some money left, you want to stop the estate, basically stop the clock running, so that you can indeed say it is over to Revenue
Suzana Popovic-Montag: And that is a really good point to address in the letter that you write to the beneficiaries reporting on the administration of the estate and reminding them that at that point, that stop clock date or whatever you want to call it, at that point forward they have an annual obligation to themselves report that income and pay tax on it.
Ian Hull: And so now we are looking for that Clearance Certificate. And even if that, as I say, the final distribution hasn’t been made, so you write a letter to CRA, you wait typically, it’s difficult to guess, it might be six to nine months, it might be more depending on the circumstances. And once you receive that final Clearance Certificate you can send out your final distribution.
Now one little twist, just as a final comment on the tax side is, is that you want also, I remind my clients to look at whether or not the deceased was a G.S.T. participant or registrant, because there can be special filings that need to be undertaken for that, and make sure that that’s been closed. So your loop is closed fully on the tax side, you’ve diarized them and then in our next podcast, we are going to talk a little bit about the accounting obligations, not from the standpoint of the government, which we have gone through, it’s going to be hopefully no more tax time once we get in our next podcast, we are going to move into the accounting obligation as between the executor and the beneficiaries.
Suzana Popovic-Montag: Well that is great, Ian. Thanks very much. I look forward to our next podcast. And just a reminder again for anyone who has any comments about our podcast, please feel free to call us at 206-457-1985 or send us an e-mail at hullandhull@gmail.com or, of course, visit our blog and our webpage at estatelaw.hullandhull.com.
Ian Hull: Thanks Suzana.
Suzana Popovic-Montag: Thanks Ian.
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Alter Ego Trusts - Hull on Estates Podcast #107
Natalia Angelini: Hello and welcome to
Welcome to
Natalia Angelini: Hi and welcome to another episode of
Chris Graham: And I’m Chris Graham.
Natalia Angelini: So Chris, welcome today. We’ve never podcasted before although it feels like we have.
Chris Graham: Many times Natalia, but I’m sure it will be a pleasure.
Natalia Angelini: Yes I think it will and today we’re talking about a subject that is quite interesting. We’re going to cover the issue of alter ego trusts. Now alter ego trusts are a newer instrument and it’s a type of trust that satisfies certain requirements under the Income Tax Act and which are defined in Section 248 of the Income Tax Act. So perhaps I’ll just start by setting out some of the requirements for an alter ego trust. Chris, you can feel free to jump in any time here.
So this is the kind of trust that is really appropriate for an older person because the settlor has to be at least 65 years of age at the time the trust was created. And the trust must have been created after 1999. So it is, as I said, a newer type of trust instrument. The settlor also has to be able to receive all of the income of the trust that arises before his or her death and no one except the settlor may, before his or her death, receive or obtain the use of any income or capital of the trust. And I think finally the trust does not make an election referred to in the Income Tax Act and that’s, for anyone who’s interested, that’s in sub-paragraph 104, sub 4a, sub 2.1 of the Income Tax Act.
Chris Graham: That was a mouthful.
Natalia Angelini: That was a mouthful, I’m sure we’ll all be rushing to go look up the Section.
Chris Graham: Applies to pretty much any reference to the Income Tax Act.
Natalia Angelini: Exactly. So those are the requirements for an alter ego trust to exist and perhaps we can chit chat about some of its other elements.
Chris Graham: Yeah, I guess the first element that any lawyer will know, but people should also be aware of, is that a trust, including an alter ego trust, is a separate tax payer. For the purposes of paying taxes, it is its own person.
Natalia Angelini: That’s right Chris, good point. What else makes the alter ego trust distinct?
Chris Graham: Well, the rule against perpetuities which non-lawyers call the 21 year rule, some lawyers do too, of course, better than me, does not apply to deferral of capital gains tax until the settlor dies or until the capital property is disposed of during the settlor’s lifetime. So basically, if the settlor lives past age – say they create the trust at 65 and they live past age 86 which a lot of people are these days, well the rule against perpetuities in other trusts might kick in. It doesn’t kick in to the alter ego trust.
Okay, so in short, what happens is that on the death of the settlor, there’s a deemed disposition of the assets that are in the trust and capital gains taxes cannot be – they can’t be set against the settlor’s capital losses or capital losses in the trust can’t be set against the settlor’s capital gains. Since the trust is, it’s an inter vivos trust which means during the lifetime of the settlor, gains will be subject to tax at the highest applicable marginal rate.
Natalia Angelini: And that’s a good point and I think essentially income earned in the trust will be taxed as if the settlor earned it personally during his or her lifetime. So even though the 21 year rule does not apply, the trust can make an election under the Income Tax Act not to have a deemed disposition on the death of the settlor. So if that election is made, the 21 year rule will apply and there won’t be a rollover with respect to transfer of assets into the trust. And I think there’s one other element to an alter ego trust that we should cover.
Chris Graham: Yes, residence is a basic general rule, residence of the trustee will determine the residence of the trust, I think that’s pretty much trite in most cases. However here’s where the kicker comes in. If the trustee becomes a non-resident, the trust will also be deemed, in many situations, to have also ceased to be a resident of
Natalia Angelini: Now I’d like to cover some of the reasons that you would want to set up an alter ego trust because this is a kind of trust instrument that is, in my view, appropriate for a narrower scope of people and not as broad an audience as some other trust vehicles. I think its best when you’re dealing with a really large estate because the best or what seems to be the best advantage to setting up an alter ego trust is avoiding probate tax. So if you’ve got a large estate and you’re potentially going to be paying significant sums in probate tax and those sums are .5% on the first $50,000.00 and 1.5% on the balance of the value of a person’s estate. So those numbers can really add up.
And one of the other great advantages of an alter ego trust is the privacy factor. The value of your assets are not made public. So if that’s important to you, then that’s one advantage of that vehicle. And something else that you can benefit from by creating an alter ego trust is creditor protection, because ownership of the asset is transferred to the trustee. However you’ve got to be careful because if it’s ultimately challenged and the purpose of the trust is found to have been set up to avoid or defeat creditors, then those assets can be clawed back and you won’t be able to protect them against creditors.
Chris Graham: Absolutely, Natalia. Federal and provincial statutes, for instance, the Fraudulent Conveyances Act contain lots of very powerful ways that creditors can go after debtors who tried or purported to enter into transactions for the sole purpose of protecting assets from claims. That’s something obviously you have to get expert advice on because it’s a case by case basis and the statutes are complex and there’s lots of case law and all the rest of it. But if you’re looking to create an alter ego trust to defraud creditors or whatever, that’s not something that they were really set up for.
Natalia Angelini: And I think one of the other advantages to setting up an alter ego trust is the prevention of litigation because it is more difficult to challenge the validity of an inter vivos trust than a Will, for instance. So that is something to be kept in mind.
Chris Graham: And one practical advantage of it, probably not really what this type of trust is designed to do, but if the settlor settles this trust, an alter ego trust, and then later becomes incapable, well that particular – the assets in the trust are self-administering. In other words, no one has to go to Court and initiate expensive and potentially contentious guardianship proceedings in order to deal with this property. You don’t have to worry about “oh my god, this person who’s been running this company is suddenly out of the picture, what do we do? Everything’s falling apart”. No, it’s taken care of, it’s in trust, there’s a trustee, these assets are well in hand and they’re also being managed in accordance with a plan laid down by the settlor already.
Natalia Angelini: So I can’t think of any other reasons for setting up a trust off the top of my head, so maybe we’ll move to reasons that you might not want to set up an alter ego trust.
Chris Graham: One of the major reasons not to, is that when you put something into an alter ego trust or any trust, you lose control of that asset, it no longer belongs to you. And it never ceases to amaze me how many people who have set up estate freezes and what not, don’t appreciate that fundamental point. It is no longer theirs when it goes into trust, whatever it is.
Natalia Angelini: That’s right. So you certainly have to be mindful of that and if, on the other hand, you do appoint yourself as trustee being the settlor, you can retain some control but you’ll forfeit your right to use the trust to reduce overall tax liabilities. So there’s a pro and con to proceeding in that way as well.
Chris Graham: This brings us back to what we were saying earlier about not being able to write off capital gains based on maybe the settlor’s capital losses on death. There’s also that aspect of tax planning, which is way beyond me.
Natalia Angelini: I’ll leave that one alone. So onto – another reason that you might hesitate to set up an alter ego trust is naturally there’s going to be legal costs and costs of obtaining tax advice. For instance, ongoing administration expenses, trustee fees and the cost of annual tax returns that need to be filed. So those are just some of the costs built in that, you know, may not be – some people may not be interested in incurring.
Chris Graham: I thought people liked paying their lawyers, their accountants, their dentists.
Natalia Angelini: Yeah I don’t think –
Chris Graham: Their financial advisors.
Natalia Angelini: So I think we’ve covered the nuts and bolts of an alter ego trust meaning what it is, what its elements are, the advantages and disadvantages of setting one up. And they certainly are, you know, a welcome edition to the tools available to people in planning their estates, particularly for the older client. However, the advantages of confidentiality and probate tax savings definitely needs to be weighed against the tax considerations and potential tax disadvantages to setting up the trust.
Chris Graham: It is a state-of-the-art statutory trust and as such, contained in the Income Tax Act, and as such it has a broad variety of advantages and disadvantages.
Natalia Angelini: If you’re interested in learning more about this subject or just in reading more on it, then there’s a couple of great papers that we can refer you to. One is by Elena Hoffstein. It’s called Alter Ego Trusts and Joint Partner Trusts: Tips and Traps. And she presented this paper at the Fifth Annual Estates and Trusts Forum. And there’s also a more recent paper by Tim Yuden, called – and it contains an annotated alter ego trust and that was presented at the Taxation of Trusts and Estates: A Practical Approach Seminar on March 3rd, 2008. So those are two great sources that we’ve certainly referred to in putting on this subject today and we hope that they help you as well.
Chris Graham: It’s nice light reading, too.
Natalia Angelini: Nice light reading. So I think that brings us to the end of our discussion this week. Thanks for listening and thanks for joining me,Chris.
Chris Graham: That was a pleasure, Natalia. I look forward to podcasting with you again soon, as always.
Natalia Angelini: Me too! So perhaps one thing we can leave you with is we’d be happy to hear from you, so you can send us an e-mail at hull.lawyers @gmail.com. Or give us a call at our comment line being: 206-350-6636.
Alternatively, you can also visit our blog page at estatelaw.hullandhull.com where you’ll get even more information and discussion on today’s practice of estate law. I hope you enjoyed the show. I’m Natalia.
Chris Graham: And I’m Chris.
Natalia Angelini: And until next time, so long.
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