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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This week on Hull on Estate and Succession Planning, Ian and Suzana continue their discussion about tax plan wills and issues surrounding multiple wills.

Multiple Wills - Hull on Estate and Succession Planning Podcast #81

Posted on October 9^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #81 of our podcast on Tuesday, October 9^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:  Hi there Ian, how are you today?

Ian Hull:  I’m just great, thank you.

Suzana Popovic-Montag:  That’s good.  I apologize for my raspy voice.  I’m coming down with a little bit of a cold and after listening to your last podcast solo, I’m quite afraid of losing my job here.  So I thought, bad voice or not, I got to show up today.

Ian Hull:  No, we couldn’t do it as a solo event, because it’s a lot more fun to do it as a team, notwithstanding your ill health.

Suzana Popovic-Montag:  Well, I think you did a great job, Ian.  And you introduced our new topic and that was just great to be able to move on to something different now.

Ian Hull:  Thanks so much.  Well, I didn’t enjoy it because it’s not the same without being able to have a little banter back and forth.  And it reminds us, we just, well this podcast will launch into the system, we’ll have just finished our Breakfast series that we conduct.  We do a Breakfast series three times a year, the firm Hull & Hull does it.  And speaking about banter back and forth, it was a good session, some really worthwhile topics were covered.  We actually touched on some of the issues that I spoke about at the podcast last week, so that was kind of fun in terms of getting other perspectives.  But I implore you, if you’re interested, or encourage you…implore is probably too strong a word…encourage you to look at the web page, because what we typically do is we webcast these as well.  So you can get a look at it currently, if you want.  But we also eventually, once we get ourselves organized, we’ll put the video of what we did last Friday on the web, so you can feel free to look and listen as you see fit.

Suzana Popovic-Montag:  And our website, just for those who are interested, is

www.hullandhull.com.

Ian Hull:  Terrific.  Well, let’s stay focused on what we’re trying to do is, you know, I mean, as I said in my last podcast, we’re talking about some of the concepts that Lindsay Histrop so eloquently presented to us at a conference we were recently at.  And we’re trying to sort of expand on some of those because we have a little more time than Lindsay did.  And I tried to…the sense that I got from Lindsay’s talk was sort of there are ways to tax plan a Will, that we can’t forget that part of it.  And we’ve spent a lot of time talking about the other half.  And we’re now coming back to what is the grounded part of it, the more sort of the meat-and-potatoes part of Will planning. 

And so why don’t we continue on with that approach.

Suzana Popovic-Montag:  Okay Ian, and just to sort of recap, I think we basically saw three points to the idea of a tax planned Will in terms of objectives.  And the first being, of course, the, you know, the one that traditionally everyone uses as an excuse to plan a Will, and that is the avoidance of probate taxes, which here in Ontario is called the Ontario Estate Administration Tax.  And it’s approximately 1.5% of the asset value that you have passing under probate.

Ian Hull:  And in the second part of what we obviously need to turn to when we’re talking about planning Wills and estate planning and considering the overlay of the tax issues in terms of the concepts, is really just talking about avoidance and deferral and what we can do in that regard, talking about a little bit of the capital gains taxes, and so forth.

Suzana Popovic-Montag: And then in terms of the third objective there is, of course, you know, avoiding US estate tax on US property and planning for a US citizen as well.

Ian Hull:  Alright, so coming back to the last topic.  I finished off talking about some joint ownership issues again with the concepts of the tax implications.  But let’s talk about what is certainly in most jurisdictions now a fairly fundamental estate planning step that is tax driven.

Suzana Popovic-Montag:  And that, I guess you’re referring to, Ian, is the use of separate Wills, so more than one Will to plan for someone’s estate.

Ian Hull:  Absolutely.  And in Ontario, we sort of got this introduced to us by legislation.  It was back, I guess, some years ago now, the Granovsky decision that opened the door up to what we call, here in Ontario, multiple Wills.  And it’s a common estate planning phenomenon.  And it’s even used in some respects in the US for certain trusts planning issues.  But the concept is is that you create more than one Will.  And it seems intuitively at the outset something that isn’t natural.  And we think, well wait a minute, how can you have more than one Will?  There’s the traditional approach before Granovsky and before we got into this was that many people who had US assets did a separate Will for the US assets.  We’re going to talk about that in some future podcasts when we deal with the US issues. 

But this is very different.  This is using in your current location, your jurisdiction where you live and where you typically own most of your assets, this is using an estate planning technique that is fundamentally tax driven, that allows us to create more than one Will.

Suzana Popovic-Montag:  And the idea really is to have each Will deal with separate assets.  So it’s not like you’re speaking about one form of asset in two different Wills.  It’s just dividing your assets into two different Wills so that one Will is traditionally one that you would probate, so you would seek Court approval of that Will, pay the requisite estate administration tax or whatever probate fees are associated with it, and then you could administer that portion of your estate.  The other portion would be dealt with in a separate Will that doesn’t need probate.  And so you can still provide for how you’d like your assets to be distributed, but you don’t have to pay tax on those assets and you don’t have to seek probate of that Will.

Ian Hull:  That’s right.  And it’s the probate tax on the assets of the separated Will that can be so fundamental in terms of the tax avoidance.  And it’s entirely legitimate tax avoidance.  But, so Suzana, let me understand.  We’ve got sort of the traditional Will that we’re going to put some assets in and then we’ll call the secondary Will the Will where we’re going to put other assets in.  What are the assets we’ll want to put in to the traditional primary Will, so to speak?

Suzana Popovic-Montag:  Well they are usually Ian, the assets that the authorities who are holding, or have some form of control over those assets, need proof of the fact that the individual who wants to bring them or liquidate them or bring them into the estate has authority to deal with those assets.  So, for instance, we know that, you know, large bank accounts, typically the banks will not just pay over money when you show them a Will that names you as an executor.  They want Court approval or Court proof of the fact that that is the Last Will and Testament, so that you are the person with authority to liquidate that investment.  And then they’ll pay that money over.  And it’s because of the fact that there are certain assets that do require some form of proof, or they require that Certificate that we have to actually obtain probate of those assets.  Other assets, which can…

Ian Hull:  Sorry, before we go to the other assets, I just want to make sure I understand though.  Because, so in this primary Will, we’ve got, like you say, this investment assets and so forth.  And when you say the Court proof, I guess we’re talking about we’ll get probate and that means either the common form, which is just the over-the-counter probate with the proper application or the more complex solemn form, which is a Court sort of generated process, which we don’t really need to worry about the difference there, just that it’s probate.

Suzana Popovic-Montag:  Absolutely.  And the point there really is, Ian, you don’t need to do this for every asset.  And a Will speaks from death.  In a Will, if it appoints an executor, it does really vest that individual with authority to act.  But sometimes people will need that one extra step, like you said, proof in common form, proof in solemn form, to actually prove that that individual has authority.

Ian Hull:  Okay, and then like you say, it’s these third party entities like the banks that say, you know what, we’re not going to just trust that piece of paper, we want you to get it sort of stamped by the Court that that is indeed the Last Will of the deceased that generates it.  Now, so we’ve got, let me just think through this.  So we’ve got the banks obviously who will typically, and my experience is, anything over $5,000 they’re going to want it.  The investment companies are going to want it as well.  And in many jurisdictions, real estate as well.

Suzana Popovic-Montag:  That’s right, yeah, because and you can sort of understand that it’s one of the biggest assets normally in someone’s estate and the individuals who are purchasing that from the estate trustee want to make sure that that individual does have the authority to deal with that asset.  And, of course, they do but, you know, it’s that little extra comfort of a Court stamp or a Court stamp of approval on it.

Ian Hull:  So these third parties then don’t get sued for sending out assets to the wrong person.

Suzana Popovic-Montag:  That’s right.

Ian Hull:  Alright.  So those are sort of the main assets that would be, I’m sure there are other assets, but for the time being, let’s sort of move now to this secondary Will.  And why would we have a secondary Will, what kind of assets would go into that?

Suzana Popovic-Montag:  Well, traditionally we see people put private company shares in that separate Will.  And the reason for that is because that again is normally one of the larger aspects of an estate in terms of the value.  And so to be able to avoid probate fees on such a valuable investment or company share worth, it is a really good way to sort of deal with that asset.

Ian Hull:  So we have these private companies and when you say private companies, of course, we’re talking about a situation where someone might have an investment portfolio that they put in a Holdco.  They separate it from themselves and put it into a company for, you know, creditor protection, for other tax reasons.  So, say there is a portfolio of $1,000,000 and you’re running it through a local investment dealer and it’s in Holdco, Xco is holding the assets.  Then those assets would, in the old days, normally fall into the primary Will and they would be subject to probate tax.  Now, we are able to, what you’re saying is we’re able to separate it.  And we put the Holdco assets and we refer to it specifically in the secondary Will and it’s important, not that we want to get into the drafting that it’s important how we describe the preambles on the two Wills and so on, there’s some technical issues.  But what you’re saying is is that we can put those in that secondary Will and then literally transfer those assets to the beneficiaries under that Will without probate and all you have to do is create the necessary internal documents through the director’s resolutions and so forth, to pass the ownership over.  And typically the directors are all closely related or know each other and so there’s a comfort there.  The directors know that indeed that is the Last Will and we’re not dealing with some mystery Will here.  So they don’t need that extra Court stamp.

Suzana Popovic-Montag:  That’s right Ian, absolutely.  And the key really is that it’s private company shares.  So if you hold stocks of, you know, a publicly traded company, of course that’s something that’s going to go back into the primary Will.  So it’s just important to keep that in mind.  And I’ve seen certainly, in addition to just those private company shares, people also will put, you know, their art or their antiques or other personalty in this secondary Will as well.

Ian Hull:  And so, just so it will be clear though, in Holdco, say we’ve got Holdco created.  You can actually pass the shares, the 100 shares of Holdco to your kids, for example.  Now that Holdco can hold private company and public company shares. 

Suzana Popovic-Montag:  Absolutely.

Ian Hull:  You could have, you know, Bell Canada in Holdco.  And it’s a great way again because Bell Canada doesn’t care.  All they care is is that Holdco still owns the shares and so there’s not the need for that extra layer of probate fees.

Suzana Popovic-Montag:  That’s right Ian.

Ian Hull:  Alright, terrific.  So I think that covers us off on that issue.  And it’s an important issue.  Not necessarily one that comes to mind in every case but if you’ve got a situation where you’ve got sufficient assets to consider it, that secondary Will is important from a tax avoidance standpoint.

Suzana Popovic-Montag:  That’s for sure.  Well thank you very much Ian, I look forward to our next podcast.

Ian Hull:  Thanks Suzana.

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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Read the transcribed version of "Estate Planning Issues for Separated Couples"

During Hull on Estate and Succession Planning Podcast #56, Ian and Suzana discuss the circumstances surrounding separated couples, remarriage and common law separations.

They discuss the impact that these separations have on estate planning including financial, tax and property ownership considerations.

READ THE TRANSCRIBED PODCAST

During Episode #43, Ian and Suzana discussed estate planning with a focus on financial topics such as tax planning, multiple will scenarios and family law issues.