All About Estates

Locking-in Your Family’s Inheritance – a Matter of “Trust”?

Today’s guest blogger is Wendy Templeton. Wendy is a member of the Wills, Estates and Wealth Management Group at LLF Lawyers in Peterborough, Ontario.  She is a well-known author and lecturer with a background in taxation of trusts and estates, business succession, and wills, trusts and estates.  She has a strong commitment to education, having made a significant contribution to the Diploma program for the Society of Trust and Estate Practitioners of Canada, and as a founding Co-Chair of the national Will Estate and Trust Fundamentals offered by the Canadian Bar Association.

Couples usually want to provide for each other when they pass away.  Where the couple is childless, or there are children from a prior relationship, they usually also want to make sure that ultimately their own family also receives an inheritance.

The question arises as to how to both provide for the surviving partner and protect the inheritance of the family of the partner who dies first.  The answer is almost always “trust”!  “Trust” your partner, or create a “trust” in your will.

The typical “I love you” will that leaves everything to the surviving partner, with the children (or families) of both partners as the alternate beneficiaries if the partner has already passed away, may work well.  However, this assumes that the children (or families) of both partners are included as alternate beneficiaries in both partners’ wills, and that both partners are comfortable that the surviving partner will not cut out the step-children in a subsequent will.  The prospect of remarriage of a surviving partner, with the resulting revocation of the existing will (in Ontario and many other provinces) can make this concern even more compelling.

If couples want to “lock-in” their own children’s (or family’s) inheritance, the standard tool in the estate planners kit is the spousal or common-law partner trust.  The surviving partner is the sole lifetime beneficiary, and there is a “gift over” on death of the surviving partner to the family of the partner who die first.  This strategy can also work well, but also has disadvantages.

First is the choice of trustees.  Trustees should be chosen who will be the gate-keepers, but this often proves to be an obstacle.  To obtain the rollover to the trust for tax purposes, the income of the trust must be payable to the surviving partner.  However, the right to encroach on capital – funds in the trust other than just the income, including payment of capital gains, can be subject to the discretion of the trustees.  Dipping into “capital” for the benefit of the surviving partner reduces the ultimate inheritance of the family of the first to die.  And it is this particular point, among many others, over which trustees often disagree.  The interests of the surviving partner and the step-children (or other family member of the deceased partner) are in direct conflict.  The surviving partner can be a co-trustee along with one or more of the step-children, but this can be an uncomfortable arrangement and many times in practice leads to friction, or litigation.  It may not be possible to identify a neutral party who will act as trustee whom both partners are comfortable choosing.

Second is the requirement to change how title to property is held; the use of the trust requires that couples sever the joint ownership of jointly held property and accounts, and change beneficiary designations.  This is not convenient, and can attract legal fees or other costs for transfers of real property.  The good news is that usually land transfer tax will not be payable and transfers between a spouse or common-law partner take place on a rollover basis for income tax purposes.

Third is the prepayment of probate fees and the need for double probate.  The estate of the first to die will usually require probate, and this will trigger a pre-payment of probate fees, or Estate Administration Tax in Ontario.    This contrasts to the situation where the surviving partner receives everything outside the estate either because property is held jointly, or the surviving partner is a named beneficiary.  In the latter case probate is only required on the death of the surviving partner, and the liability for probate fees is deferred until then.  Note that probate fees will still only be payable once on the assets going into the trust.

Lastly, it is not possible to use a trust for the proceeds of a RRSP or RRIF and also get the rollover of these funds for tax purposes.  This is a very vexing situation, better left for the subject of a further blog.

Thanks for reading

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