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Listen to Considerations Regarding Testamentary Trusts and Charitable Gifting Issues

This week on Hull on Estates and Succession Planning, Ian and Suzana discuss considerations that must be taken into account while preparing Testamentary Trusts and issues surrounding charitable gifting.

Considerations Regarding Testamentary Trusts and Charitable Gifting Issues - Hull on Estate and Succession Planning Podcast #88

Posted on November 27^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #88 of our podcast on Tuesday, November 27^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.

Suzana Popovic-Montag:  Hi there Ian.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  How are you today?

Ian Hull:  I’m fantastic, how about yourself?

Suzana Popovic-Montag:  Just great, thank you.

Ian Hull: It is a bit of a frustrating week.  We were…both of us actually…ended up being too busy to get over to Terry Fallis’ launch of his book.  Terry Fallis is a well-known podcaster, probably Canada’s…one of Canada’s very best podcasters certainly, but most well known.  He does a podcast called Inside PR and he just launched his own book, which he interestingly first launched on a podcast series and then has it published.  And there was a book launch this week that we ended up getting stuck doing a mediation, so we couldn’t get over to it, with some great frustration.  But I just wanted to give Terry a little plug and tell him again we’re sorry we weren’t there but we hear it was a great event.

Suzana Popovic-Montag:  And Terry, if you are listening, congratulations and all the very best with the book sales.

Ian Hull:  Okay.  So turning from…and his book, sorry, is a political-based book, it’s a fiction book, but he talks about life and politics in this book and it’s really a great…I’ve read part of it and I’ve heard part of it, so it’s a great read, I’m looking forward to reading it. 

But we have to transition to a less exciting aspect of life maybe for some, and that is testamentary trusts.  We were promising that we would kind of wind up our discussion on this today and move into some charitable gifting issues that we want to talk about.  So let’s just finish up the testamentary trusts.  We’ve talked a lot about what they are, the special nature that they are as opposed to an inter vivos trust, or a trust during the lifetime.  The testamentary trust is a creation out of the Will.  And because of that, it has some positives and some negatives.  And we’ve talked a little bit about some of the timing issues that we’ve got to be concerned with.

Suzana Popovic-Montag:  We also mentioned, Ian, a couple of the drafting considerations that people want to keep in mind when they’re creating these kinds of trusts in their Will.  And just in terms of tying up, I’d like to suggest that when people are thinking about these situations, that they consider including a power in the trust to reorganize, in effect, a post-mortem estate freeze.  And that’s a little bit unusual in terms of the planning and the timing of planning an estate freeze, but to have that kind of power to a trustee will help in certain situations where the facts sort of suggest that that would be a natural idea.

Ian Hull:  You know, that’s such a good point.  And if you can put the power into the trust, it certainly makes it a lot easier to exercise that creative planning.  And that’s really…I mean the truth is, is that as much planning as we put into estate planning steps before death, while we’re alive, the rules change every day.  And to allow for something like you’re suggesting, a post-mortem or after death estate freeze, might be appropriate in the circumstances.  And if you’ve got the broad language in the trust, you give yourself some flexibility so that when you hand the Will over to the lawyer or an accountant who are going to administer this estate, you’re giving them a little bit more flexibility and more flexibility means possibly chance of taking advantage of laws that have changed since you did your Will.

Suzana Popovic-Montag:  That’s a good point, Ian.  And you may also want to consider including the power to move the trust to different jurisdictions.  Again, for that exact same reason, if the laws were to change and there were to be a benefit to perhaps moving a trust from one location to another.

Ian Hull:  Gee, that’s a good point, because, you know, in the past…and gosh we’ll see much of the change over the future too…but two classic illustrations of where, if you’ve included that power to move the trust, became advantageous.  One was years ago, not that long ago actually, was Alberta and now the Alberta situation isn’t quite as favorable.  But in Alberta, there was a great move to establishing trusts in Alberta, holding companies in Alberta and the like, to take advantage of the slightly less tax rate that was being charged out there.  It was kind of a…it was a unique situation.  Again, we’re not going to try to drill down too deep on the tax issues but there were significant reasons to move a trust or a corporation to Alberta for some time.  And again, we want to, you know, give some flexibility.  And the other classic scenario is, of course, the fact that we’re moving jurisdictions so much, our clients are, that it may become a situation that I ran into the other day where a client came to see us and they had a trust that really, for a bunch of technical reasons, was better suited to be established in the U.S.  Basically what had happened was since the family had created the trust, the children had all moved down to the U.S..  There was no reason, all of the assets were actually publicly traded U.S. companies and for a group of sort of personal reasons, that was the best move.  And sure enough, we looked at the terms of the trust, we had the power and it created another opportunity.  And now we wouldn’t have given the advice, because we’re not the tax planners.  But we were…I was in the room with someone who had the tax planning expertise and they just said look, I think our best move now is to get this trust into the U.S.  Ian, do we have the jurisdiction?

Suzana Popovic-Montag:  And so the key really is to include these kinds of broad, discretionary powers in the trust document so that trustees can respond to changes in either the circumstances or even the law, or, you know, as you say, the tax consequences of something may be better if they can float the jurisdiction of a trust elsewhere.

So, sort of transitioning, Ian, then into the discussion about the charitable tax credits that arise on death.  I think that it’s important that we keep in mind that charitable gifts that are made in a Will are deemed to have been made in the year of death.  And the Income Tax Act here in Canada speaks to that in Section 118.1(5).

Ian Hull:  You know, that’s a great point because, you know, this is where it’s worth getting a little bit technical about the charitable tax credits, in the sense that identifying that there are some really special circumstances that click in on death.  So the other part of that is, is that you have the within the year of death rule, and then you have the fact that excess of deductions may be carried back one year as well.  That’s the same provision - Section 118, just sub (4).  But…and I guess again, we’re not trying to sort of espouse too much on the tax rules but, you know, before and after death, there are some creative charitable tax credits that can be applied here.

Suzana Popovic-Montag:  And so the point really is that charitable gifts that are made in the year of death can be claimed up to 100% of the income in the year of death, and then at the prior year as you just said.  So that really is the benefit of a charitable gift in a Will.

Ian Hull:  And then the other twist is that the complete capital gains tax relief for charitable donations of certain charities.  And there, you know, again, you have to go to the Act and work through this, because they’re prescribed.  But there’s a certain complete capital gains relief that may be available as well.

Suzana Popovic-Montag:  So just to keep in mind, though, that you have to be able to determine the amount of the gift by actually referring to it in the Will at the time of death.

Ian Hull:  Right.  And again, these are sort of technical rules but rules that can be very important in terms of the timing.

Another, you know, again talking about the charitable tax credits on death.  It’s important that the Will not only fix the amount, but it really identifies with some certainty how you’re going to deal with the charitable gifts.  And really, I think the message here is, is that if we can give the executors lots of discretion to choose one or more charities but maybe not an amount, that’s another creative drafting plan.  But what we’re trying to get at here, for the purpose of today’s podcast, is to maybe ask your estate planner and make sure that when they’re going the charitable gifting, that they’re being very careful on the drafting side to ensure that they’re, you’re going to get full advantage of the tax relief, which, you know, on even modest estates, can prove to be a very significant amount.

Suzana Popovic-Montag:  And if a charitable legacy is actually included in the Will, you also may want to keep in mind that you should provide the executor with a discretion to allocate the assets, either in species, so specifically to allocate the specific assets, to satisfy the legacy, including some of those listed securities you referred to earlier, Ian, in order to be able to claim the enhanced charitable tax credit.

Ian Hull:  So Suzana, I know you’ve written on this and done a lot of work in this area, the charitable gifting side.  What happens, though, when you have a charity that’s name is changed or the charity is, it vanishes.  Is there something we can do at the planning stage to help deal with that?

Suzana Popovic-Montag:  That’s a great suggestion, Ian.  There is something that we should try to do and that is to include some kind of language which, you know, we lawyers call “sipra language” or a “sipra clause” that allows an amendment of a charitable gift in the event that, after the person dies or passes away, the charity is no longer in existence or it’s changed its name or its changed its purposes.  And so it’s sort of alike a catch-all clause that allows you to be able to uphold the charitable intent, to uphold the charitable gift, so that you can get all of the advantages out of the gift that you were hoping to, by creating it in the first place.

Ian Hull:  Gee, that’s good to know.  And that’s sort of a nice outlet pass that’s available to us from the drafting side.  And I guess the lesson…the other lesson is that if we don’t press our advisors on these issues, then what we might end up doing is, and we’ve talked about some of these neat charitable tax credits and benefits of gifting on death and prior to death.  If we don’t, the gift may fail and then there will be no deduction and we’ll have not only lost the intention of our hope to charitably gift but we’re not going to get any financial benefit.

Suzana Popovic-Montag:  Absolutely.  And that really is the key.

Ian Hull:  Okay, great.  Well, you know, I think that’s a good wind up of the question of the charitable tax credits.  We didn’t want to get too deep into this today for a couple of reasons.  One is, we don’t pretend to have the tax expertise but secondly, I think that it’s one of those areas that’s got some unique characteristics.  We may be…well we certainly plan in the future, to deal with some more of the charitable giving issues that are important, not just from a tax standpoint but from an estate standpoint.  And we’re going to be talking about that more in future podcasts.  But at least we’ve touched on the tax credit issue and we have a better understanding of what is available.  And then I think what we should do is spend some time on specifics of what are the payment of taxes on death?  What do we do to make sure that we can attend to this and are there ways to sort of predict what we’re going to have to pay on death?  Because death taxes are a huge issue for people and  let’s spend some time in our next podcast really telling ourselves, reminding us where these taxes are going to have to be paid.  So I look forward to doing that and that’ll be a fun podcast.

Suzana Popovic-Montag:  I look forward to it as well, Ian.  Thanks very much.

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 The Potential of The Testamentary Trust

This week on Hull on Estate and Succession Planning, Ian and Suzana continue to focus on testamentary trusts, the most common estate-planning step after the simple will.

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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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