Why You Need a Will

Upon the breakdown of a marriage or a long-term relationship, there are a number of issues which normally need to be resolved depending upon the circumstances of the parties. These issues may include: the custody of children, child support, spousal support and the division of property.

If you presently have no valid Will, or if you have not reviewed your Will lately, you should consider meeting with a member of our Wills, Estates and Trust Practice Group to obtain advice on how best to protect your family or loved ones in the event of your death.

The following true-to-life scenarios may help to illustrate some of the dangers of failing to plan for your demise, or proceeding on faulty assumptions as to your present estate plan.

1. You are a 65 year old woman, recently married for the second time to a wealthy man.

You signed a will shortly after the death of your first husband which leaves your entire estate to your three children, and you see no reason to make any changes to that will, in view of the fact that your new husband has no need of your assets. Did you know that your recent marriage revoked your previous Will, and if you die without making a new will, your husband will inherit a significant portion of your estate?

2. You are a 50 year old man, divorced from your wife of 35 years.

You remain “best friends” and are very much in each other’s lives. You have no children and both of your parents and your only brother have died. You have two nieces which you barely know. You made a Will 20 years before your divorce which leaves your entire estate to your former wife. In view of your continuing relationship, you see no reason to change the disposition of your estate. Did you know that upon your death, any benefits accruing to your former wife are revoked, absent a contrary intention contained in your Will, and that your estate will devolve upon your nieces?

3. You are a 35 year old male, married with three children ages 1 month to 5 years.

Your wife is a stay-at-home Mom with no job skills and no assets of her own. You have no Will. Did you know that if you die without a Will, your wife will have to share a substantial part of your estate with your children, and may not have enough to live on without being forced into employment to make ends meet? Did you also know that any share to which your children are entitled must be paid into Court and supervised by an official of the Ontario Government until they attain the age of eighteen years?

4. You are married and all of your assets are owned jointly with your spouse.

You have no children, and you see no need to prepare a Will at this time, since on the death of either one of you, the survivor will inherit everything. The survivor would of course prepare a Will at that time. Did you know that if you and your wife die in a common disaster, one-half of your joint estate would be divided among members of your family, which could include parents, siblings, and nieces and nephews, while the other half of your joint estate would be divided in the same fashion among members of your spouse’s family? Is this what you would want?

5. Consider the same scenario as above.

Instead imagine that you die immediately in the same disaster, while your spouse survives, but dies from his or her injuries, one day later. Did you know that your entire joint estate would go to your spouse’s family?

Make an appointment with one of our skilled professionals today, to ensure that your wishes will be implemented on your death, and further to determine the most cost efficient and practical methods of accomplishing that objective. At the same time, consider planning for potential incapacity by putting Powers of Attorney in place.

If you have questions about your will or would like to draft a will, please contact one of our family law lawyers at (613) 728-8057. You can also contact Gail Nicholls directly at (613) 288-3234 or by e-mail at gailnicholls@tslawyers.ca.

Gail Nicholls,
Counsel Group,
Tierney Stauffer LLP

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.

U.S. Estate Tax – Should You be Concerned?

We have all heard the saying that there are two things in life that are certain: death and taxes. For tax and estate  professionals, both are always concerns but especially so for clients owning U.S. properties or assets. This is due to the U.S. estate tax.

Canada does not impose an estate tax upon the death of an individual. In fact, when Canadians die they are deemed to dispose of all their capital property at fair market value.

The U.S. system works differently: upon the death of a U.S. citizen, a tax is levied on the fair market value of the  deceased’s world-wide property. Furthermore, the U.S. estate tax applies to all property situated in the U.S. including  property owned by non-residents of the U.S. (oft en referred to as “Canadian Snowbirds”).

Consequently, upon death, a Canadian resident who owns U.S. real property or U.S. stocks may be regarded to have a large “deemed” capital gain with respect to such property in addition to a possible U.S. estate tax liability depending on the value of their U.S. properties or assets.

The first $3.5 million USD of a U.S. citizens’ estate is exempt from tax.  However, non-residents, including Canadians, are only entitled to a pro-rated exemption under the Canada-U.S. Tax Treaty. This exemption is equal to $3.5 million USD multiplied by the ratio of U.S. property to your worldwide estate. Essentially, if your worldwide estate is worth less than $3.5 million, you need not worry about paying  U.S. estate tax … at least for now.

In June 2001, the U.S. passed a law that commenced the phasing-out  of the estate tax over the following decade.  Essentially, the estate tax rate has been gradually reduced and the exemption amount increased and, based on the legislation, the estate tax will be repealed  for the 2010 tax year. However, this may not be permanent as the legislation contains a “sunset clause” whereby, unless further steps are taken by Congress, the repeal of the estate tax will only last for one year, being 2010.

In 2011, the estate tax rules will revert back to the rules applied before 2001 resulting in the effective exemption of only $1 million USD (compared to $3.5 USD in 2009) and a maximum estate tax rate of 55% (compared to 45% in 2009). Many U.S. tax experts expect this issue to be addressed by Congress already proposed legislation that would cap the top estate tax rate at 35% and maintain the personal exemption at $3.5 million USD.

Nonetheless, Canadians who own U.S. property or assets should consult their tax professionals until Congress legislates on this issue. Until Congress acts on this issue, Canadian Snowbirds should review the U.S. estate tax with their estate planning advisor.

Canadians who have an estate worth more than $1 million USD may be at risk of having to pay U.S. estate tax.

If you have questions regarding this issue or any other issue pertaining to your estate, please contact Sebastien Desmarais, Associate, Tierney Stauff er LLP at (613) 288-3220 or sdesmarais@tslawyers.ca.

Sébastien Desmarais
LL.B., LL.L., J.D.
Associate, Tierney Stauffer LLP
This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

What is a Henson Trust (Absolute Discretionary Trust)?

A Henson Trust is an excellent way to allow for financial care for disabled children after the death of the parent(s). The terms Henson Trust, Absolute Discretionary Trust and Discretionary Trust are used interchangeably and refer to a very specific type of trust when used in the context of planning for a person with a disability.

The purposes of a Henson Trust are to protect the assets (typically an inheritance) of a disabled person, as well as that person’s rights to collect government benefits and entitlements.

The key provision of a Henson Trust is that the trustee has “absolute discretion” in determining whether to use the trust assets to provide assistance to the beneficiary, and in what quantity. This provision means that the assets do not vest with the beneficiary and thus cannot be used to deny means-tested government benefits.

In addition, the trust may provide income tax relief by being taxed at a lower marginal rate than if the beneficiary’s total assets were considered. It can also be used to shield assets from matrimonial division in case of divorce of the beneficiary. In most cases, the trust assets are immune from claims by creditors of the beneficiary.

A Henson Trust can be established either as an Inter Vivos (Living) or a Testamentary Trust (Created by last Will and Testament). The most commonly used type of Henson Trust is the Testamentary Trust established in a parent’s or caregiver’s Will.

History of the Henson Trust

Leonard Henson had a daughter named Audrey. Audrey was a person with a developmental disability and she lived in a group home managed by the Guelph Association for Community Living. Leonard knew that if he left his estate directly to his daughter, it would exceed the allowable asset limits as set out by the Family Benefits Allowance (now called the Ontario Disability Support Program). He realized that having assets in the hands of his daughter directly would not be to her advantage and that her benefits would be terminated until the assets were “spent down” to a level below the threshold amount. In addition, Leonard’s wife had pre-deceased him and he had no other family.

Leonard discovered a technique that would allow Audrey to retain her government benefits while at the same time allowing her to receive quality of life enhancements from his estate. That technique was the use of the Absolute Discretionary Trust to be created in his Will as a Testamentary Trust. The Will required the creation of an Absolute Discretionary Trust which appointed the Guelph Association for Community Living as Trustee and his daughter Audrey as beneficiary of the trust. Once Audrey died, his Will instructed that the remaining funds in the Trust were to be passed on to the Guelph Association for Community Living.

The Ministry of Community, Family and Children’s Services (the ministry which controls the FBA (ODSP)), determined that Audrey had inherited the estate of her father and since it was in excess of the allowable amount of assets, they terminated her benefits. The Guelph Association for Community Living challenged this decision and the Ministry took the trust and the Trustee to court. The first court found that the funds contained in Audrey’s trust account did not meet the FBA (ODSP) definition of assets and therefore, it ruled in favour of the Trustees. The Ministry launched an appeal. The appeal reached the Supreme Court of Ontario and in September of 1989 was dismissed. The court allowed the trust to benefit Audrey without affecting her government benefits.

That decision has enabled families who have a son or daughter with a disability and are residents of Ontario with a vehicle in which they can place assets for their children without disqualifying them from receiving the ODSP payments to which they would otherwise be entitled.

For further information or assistance, please contact Douglas Laughton, Partner, Tierney Stauffer LLP at 613-288-3225 or dlaughton@tslawyers.ca. If you have questions about trusts in general, you can contact us at 613-728-8057 or by e-mail at info@tslaywers.ca.

Douglas J. Laughton
B.A. (Hons.), LL.B.
Partner, Tierney Stauffer LLP

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

The Role of Life Insurance in Estate and Tax Planning

The best way to increase the value of your estate is to minimize the tax implications arising on your death. On that basis, because of the potential tax savings, life insurance policies are useful estate planning tools that ought to be considered when planning your estate.

TAX BENEFITS
One of the greatest benefi ts of life insurance is that, upon the death of the insured individual, it provides a tax-free lump sum payment directly to the designated beneficiary(ies), tax free. Consequently, the insured individual knows that he or she provided protection and financial security to his or her surviving spouse or his or her surviving dependents.

Another reason to consider life insurance in the context of estate planning is estate preservation. The Income Tax Act provides that a deceased taxpayer is deemed to have disposed of each capital property owned by him or her  immediately before death for proceeds equal to the fair market value at that time. For tax purposes, that signifies a deemed a capital gain will be realized upon death.

In this context, life insurance may be purchased to provide the necessary funds to pay the capital gain, thereby  preventing the beneficiary(ies) of the estate from having to sell some of the assets to pay for the taxes.

Since the proceeds of the life insurance are paid directly to the designated beneficiary(ies), they do not form part of the estate and, as a result, probate tax is saved on that amount. It may be advantageous to transfer cash into life insurance and designate a beneficiary(ies) to avoid probate tax being levied on the value of these assets in the estate.

Life insurance should be considered a valuable estate planning tool as it can be cost efficient and will allow the insurance proceeds to be received tax-free by the designated beneficiary(ies).

TRUSTS
Th ere has been much debate as to whether one’s life insurance proceeds should be paid to their estate or to designated individual beneficiaries. Fundamentally, the issue is whether the proceeds are to be paid to a designated beneficiary,  thus avoiding probate tax, or paid to the estate in order to take full advantage of the graduated tax rates available to testamentary trusts on the income generated after death by the insurance proceeds.

The testamentary insurance trust may ultimately be the solution to that debate as it allows for funding of a trust using insurance proceeds such that the trust will also qualify as a testamentary trust for tax purposes. It is important to ensure
that the parameters of the testamentary insurance trust have been established prior to death in the deceased’s will in a manner intended to avoid probate tax. Also, care must be taken to ensure such trust meets the defi nition of a  testamentary trust and that it comes into eff ect in such a way so as to avoid probate tax.

If structured properly, the estate will avoid paying probate tax on the proceeds of the life insurance while the beneficiaries will benefit from the graduated tax rates of the testamentary trust on the income generated by the insurance proceeds. Th is arrangement may translate into considerable taxsavings for the beneficiaries.
THE ROLE OF LIFE INSURANCE IN A BUSINESS SUCCESSION PLAN
When developing a business succession plan, consider the use of life insurance as a source of funding to provide for the needs of the business upon the death of the business owner, a key executive, or shareholder. There are several key
tax advantages in using life insurance proceeds.

One of the main tax advantages is arranging for the life insurance proceeds to be payable to the corporation on a tax-free basis. As a result, the proceeds of the life insurance (over the adjusted cost base of the policy) will increase the capital dividend account of the corporation thereby allowing for the payment of tax-free capital dividends to the shareholders of the corporation or to the estate of the deceased shareholder. Depending on the Will of the deceased shareholder, the surviving spouse may receive tax-free capital dividends in a spousal testamentary trust allowing for income splitting.

Life insurance can also be an efficient means of funding the obligations under a buy/sell agreement found in a  shareholder agreement. The life insurance proceeds would be paid to the corporation thereby increasing the capital dividend account allowing for tax-free capital dividends to be available for purchase by the surviving shareholders from the deceased shareholder. If the shareholder  agreement provides for such a buy/sell agreement, the estate may also be entitled to claim the capital gain exemption on the sale of the shares to the surviving shareholders.

In order for this to occur, the shares must meet the definition of “qualified small business corporation shares” as defined in the Income Tax Act. If so, the estate would be eligible to receive up to $750,000 in tax-free shares. The business succession options set out above must be carefully implemented otherwise the business owner or the corporation might be assessed a taxable shareholder benefit by the Canada Revenue Agency.

It is not uncommon for a business owner to own the shares of a holding company which in turn own shares of the operating company. In those situations, there are a number of factual and tax considerations that must be considered in determining who will be the owner and beneficiary of the insurance policy; and which entity must pay the insurance premiums.

Life insurance may be used for reasons other than estate and business succession. Indeed, it may be possible to use some life insurance to fund the business owner’s retirement or for the company to offer some form of “supplementary executive retirement plan” to an executive person.

The success of your estate planning relies on a clear understanding of the rules of taxation upon death and the rules of taxation of life insurance. Seek professional advice when planning your estate, especially if you are considering implementing a business or succession plan with the use of life insurance, because an error could result in adverse tax consequences.

If you have any questions concerning estate or tax planning, please do not hesitate to contact me directly.

Sébastien Desmarais
LL.B., LL.L., J.D.
Associate, Tierney Stauffer LLP

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Common Law Spouses and Intestacy

Many common law spouses believe that because they have been living together, they are considered married in the eyes of the law and consequently, if one common law spouse dies intestate (without a Will), the surviving one common law spouse is entitled to receive part of or the entire Estate. This is not the case.

The Succession Law Reform Act (the “SLRA”) states that if one dies without a will, married spouses are entitled to a preferential share of the estate equal to $200,000 plus 1/2 of the balance to share with the deceased child or 1/3 of the balance to share with the deceased’s children.

However, common law relationships of heterosexual or same sex partners, lack the same recognition as married spouses under the SLRA leaving the surviving common law spouse with no statutory right to an inheritance from their spouse’s Estate.

That means if a common law spouse dies without a will, the surviving common law spouse has no entitlement to any part of the Estate.

For example consider Jack and Jill who have decided never to marry but have been living together for 15 years and have three children aged 12, 9 and 7. Unfortunately, Jack dies in a car accident leaving an estate valued at $300,000. Jack has no Will.

Because Jack and Jill were never married, Jill has no legal right to an inheritance or to property through an equalization payment and Jack’s estate will be divided equally among his three children where each would inherit $100,000 (held in trust until they have reached the age of majority).

As a common law spouse, Jill can only hope to succeed in an action where she would sue the Estate seeking support as a dependent.

The above example may seem unfair but the Supreme Court of Canada in Walsh v. Bona, held that such distinction does not offend the Canadian Charter of Rights and Freedoms because the differentiation was based on the individuals’ choice of whether or not to marry.

Common law spouses who want their spouse to have a right to an inheritance in their Estate must have a valid Will. If you or someone you know is in a common law relationship and does not have a Will, to avoid a situation such as this, it is time to consider getting one.

If you have questions regarding this issue or any other issue pertaining to Wills and Estates Planning, please contact:

Sébastien Desmarais
LL.B., LL.L., J.D.
Associate, Tierney Stauffer LLP

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Estate Planning and Probate Tax

Probate is a legal process that confirms and validates the last Will and Testament of a deceased person.

There is no specific law in Ontario that requires the Will of a deceased person to be probated. As a general rule, the larger and more complex the assets held by the deceased, the more likely the probating of the Will shall be required. Probate tax is calculated at an approximate rate of $5.00 per thousand dollars for the first $50,000 in the Estate and $15.00 per thousand for every thousand dollars over and above $50,000 in the Estate.

Depending on how the assets of the Estate are held, probate tax can be reduced or even avoided altogether.

With the proper estate planning, a business owner can eliminate some of the probate fees that are triggered by his or her death and the ensuing transfer of property. One way to do this is through the use of “double Wills” where one Will deals with assets requiring probate (such as cash and real estate) and the other deals with assets that do not require probate such as shares of a corporation.

If ou have any questions concerning the termination of an employee or employment law in general, please do not hesitate to contact David Sinclair directly 613.288.3226 or by email at dsinclair@tslawyers.ca.

David Sinclair
B.Com., B.A., LL.B.
Associate, Tierney Stauffer LLP

 

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Trustees Controlling the Corporation – a Challenging Situation

Estate planning intrinsically results in tax planning; one cannot dissociate the two. Indeed, the easiest manner to maximize the value of an estate is by minimizing the tax payable at death. The same approach applies to the successful business owner; maximizing profit by minimizing taxes.

Trusts are oft enused to accomplish eff ective tax/estate planning. However, the use of a trust to control a private  corporation imposes fiduciary obligations on the part of the trustees to administer the corporation for both the shareholders and the beneficiaries of the trust; a challenging balancing act for the trustees at the best of times.

This newsletter will explore the various duties of trustees and some of the conflicts of interest that can arise.

Powers and Authority of Trustees and Directors
Trustees have a duty to carry their powers and authority in accordance with the Deed of Trust whereas Estate Trustees have a duty to act in accordance with the instructions conferred by the Testator’s Will. Trustees have a fiduciary duty to act in the best interest of the beneficiaries; that is a duty of loyalty and a duty of care toward the beneficiaries.

Trustees have three fundamental duties they must always comply with:

• they may not delegate their duties to a third-party;
• they may not profit personally from their dealings with the trust property; and
• they must act honestly, with prudence and reasonableness.

Trustees also have a duty to act personally, with care and in good faith and must avoid conflicts of interest.

Directors, on the other hand, owe a fiduciary duty to the corporation, and only the corporation. Directors are intended to make policy and specific decisions concerning a variety of business risks as long as it is for the best of the corporation.
It is said that the directors are considered to be the alter ego of a corporation.

Trustees Controlling a Corporation
In many tax planning strategies such as an estate freeze, a family trust is introduced as the majority shareholder of the corporation holding the shares that will represent the future growth of the corporation.

The introduction of a family trust as the majority shareholder is usually viewed as providing greater flexibility in tax planning strategies and estate planning but results in different considerations for decision-making: the duties of the
directors versus the duties of the trustees.

Trustees holding the majority of the shares of a company face the possibility of having to make decisions that may impact the viability and value of the corporation and intrinsically affect the beneficiaries’ interest in the trust. It is nearly impossible to avoid some conflict of interest in these circumstances; indeed when acting as both a trustee and a director, the individual has a duality of fiduciary duties which may ultimately conflict. Where trustees hold shares representing voting control of the corporation, it is difficult to imagine how they can exercise their fiduciary duty without being appointed on the board of directors of the company. They may elect to only have one of them appointed but such does not discharge the other trustees of their fiduciary duties; they nonetheless must place themselves in a position to make informed decisions concerning the company in order to protect the assets of the trust.

If the trustees decide that all of them will be elected to the board of directors, they must vote in accordance with their fiduciary duties as trustees. If the Deed of Trust or the Will requires a decision by vote by majority, then the trustees must vote and make decisions as directors in a fashion similar to casting their vote as trustees.

There are significant differences in the operation of trust law and corporate law. The trustees who must act appropriately as directors must also act in the best interest of the beneficiaries which can sometimes conflict with what is in the best
interest of the shareholders; not always an easy juggling act.

Estate Trustees Controlling a Corporation 
Estate trustees are faced with the same challenges stated above and, further, they must as well meet their fiduciary  duties toward the beneficiaries of the estate. The issue is therefore how can you balance the duty of care to the
beneficiaries of the estate and the corporation??

Estate trustees must also deal with estate planning strategies that render their decision-making even more difficult as they are required to consider different beneficiaries who may have different interests. For example, what if the testator
leaves a life interest of the income of the corporation to his spouse but on her death the shares including all income not paid to the spouse, are to be equally divided amongst his children. In whose interest do they manage the corporation,
the spouse or the children?

This is just one example of the complex issues that can arise from the duality of acting as estate trustee and director of a corporation. A well drafted Will should provide clear instructions to the estate trustee for such circumstances but
often it does not, leaving the estate trustee in a thorny situation.

It is noteworthy that if the estate is dependent upon an income stream from a corporation, the estate trustee must serve as a director to ensure that the appropriate business decisions are made on timing and distributions of profit of a business.

However, an estate trustee/director  of a corporation is caught in an impossible situation that can only result in a conflict of interest. The estate trustee/director must then face the possibility of having their decisions reviewed by either the shareholders or the beneficiaries of the estate.

Jurisprudence appears to indicate that the beneficiary of an estate is not entitled to any disclosure of the corporate and financial records of the corporation. However, as long as the beneficiary’s interest is involved, the beneficiary is entitled and may seek from the estate trustee all documents or communications between the trustee and the corporation.

Furthermore, trustees may also see their actions as director questioned by the beneficiaries claiming an “oppression remedy.” Professionals who advise on estate planning ought to consider this remedy when discussing estate planning with the testator.

The decision of the trustee/director may always be subject to review and remediation in accordance with the available remedy under the legislation or equity.

Conclusion
We have seen that it is nearly impossible to avoid a conflict of interest when one is acting as both a trustee and a director.  In those instances, the trustees/directors have a duality of fiduciary duties which may ultimately result in a conflict.

Many professionals view this “conflict” as a novel concept and dismiss it on the basis that in practice, the trustees and directors have the discretion to administer the trust and the corporation “as they see fit.”

I submit that such view fails to properly advise trustees who must carry both the duties of trusteeship and directorship. It is true that trustees may be absolved of any personal liability if the Deed of Trust or the Will so states. However, that is only partially true as they can still be held liable under equitable remedies or under corporate legislation.

If you are acting as both trustee and director, it is essential that you recognize your fiduciary duties and to whom to you owe such duties. Failure to do so could result in untenable positions and potential personal liability. If you have any questions concerning the duties of a director or trustee, please do not hesitate to contact me directly at 613-288-
3220 or by email at sdesmarais@tslawyers.ca

Sebastian Desmarias
Associate, Tierney Stauffer LLP

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Trusts and the 21-Year Rule

Trusts, once considered a tool exclusively for the wealthy, have become enormously popular in the last ten years for middle income persons and for good reasons: trusts provide great flexibility in tax planning strategies and estate planning.  

Trusts are subject to specific tax rules that ought to be fully understood and complied with.  One of those is the “21-year deemed disposition” rule where, for tax purposes, a trust is deemed to dispose of certain types of property for fair market value proceeds.  Failing to acknowledge this rule may result in the trust realizing capital gains, ordinary income or recapture without receiving actual proceeds of disposition.

This newsletter will review the 21-year deemed disposition rules and some tax strategies to help avoid or defer the tax implications.

The 21-Year Deemed Disposition Rule

The 21-year deemed disposition rule exists in order to prevent property held by a trust from being passed from generation to generation on a tax-free basis. 

The 21-year deemed disposition rule does not apply to all trusts or all types of assets held in a trust. Indeed, the rule applies to trusts which hold depreciable property, non-depreciable capital property, Canadian and foreign resource properties, land inventory and NISA funds No. 2.  More specifically, the deemed disposition rule applies to:

§  Qualified small business corporation shares

§  Qualified farm property and qualified fishing property

§  Mutual funds and other shares

§  Real estate and depreciable property, bonds, debentures, promissory notes and other properties

§  Personal-use property

§  Listed personal property (as defined by the ITA)

§  Land held as inventory

Interestingly, for estate planning purposes, life insurance does not fall into any of the above classifications and therefore is not subject to the deemed disposition rule.

Strategies for Dealing with the 21-Year Rule

For obvious reasons, trustees and beneficiaries want to avoid the 21-year deemed disposition rule as no one wants to pay taxes if they can be avoided. Happily, there exists several strategies allowing for the deferral or avoidance of the 21-year rule.

The easiest way to avoid the 21-year deemed disposition rule is to simply have the trust property distributed to the Canadian resident beneficiary on a tax-free basis (the Income Tax Act allows such tax-free distribution). One of the drawbacks of this option is that the beneficiaries lose their opportunity for income splitting and other tax planning strategies and the trustees lose control of the assets.

Depending on the assets held by the trust, another option is to distribute only a portion of the trust’s assets to the capital beneficiaries.  Essentially, all assets with accrued gains would be distributed to capital beneficiaries on a tax free basis while the assets that do not have a component capital gains could be retained by the trust. 

If a trust holds shares of a private corporation the trustees must consider the 21-year deemed disposition rule because failure to do so could result in double taxation; indeed the trust would realize a capital gain on the deemed disposition of the shares and, if the shares were later redeemed, the trust would also realize a deemed dividend. 

To avoid any double taxation, one strategy is to incorporating a new company (Newco) which shares will be owned by a new trust (most likely with the same trustees and beneficiaries as the first trust).  The trustees of the first trust would then make Newco a beneficiary of the first trust (if there is a power to appoint new beneficiaries).  Then, the first trust would distribute the Oldco shares to Newco prior to the 21-year deemed disposition date. 

There are other very similar strategies, to the one above, when dealing with a trust holding shares of a private corporation and the 21-year deemed disposition rule and the trustee(s) should consult with his or her tax advisors as to which strategy might be best.  The trustees must also be aware of the uncertain nature of the GAAR (General Anti-Avoidance Rules under the Income Tax Act) when implementing a 21-year deemed disposition strategies.

Estate Planning, the use of Trusts and the 21-Year Deemed Disposition rule

In estate planning, it is common to establish a trust under the Last Will and Testament and fund such trust with assets flowing through the estate of the deceased.  Such trusts are referred to as a “testamentary trust:” a trust that arose as a consequence of the death of a testator.  Testamentary trusts provide a unique opportunity as they pay tax on a graduated basis allowing for a variety of tax savings and income splitting.

In estate planning, the 21-year deemed disposition rule is often misunderstood and too often we have advisors recommending that the testator or the estate trustee avoid the 21-year rule “at all costs.”  As a result, the Will may have a clause requiring the trustee of the testamentary trust (or the estate trustee) to distribute the capital of the trust to the beneficiary before the 21-year deemed disposition in order to avoid a capital gain. 

Although such advice is not technically wrong, it is often given without an adequate explanation or understanding of the 21-year deemed disposition rule and may not realize the maximum benefit from the trust.  For instance, what if the assets of the trust do not have a capital gain component, i.e., no capital gain is arising at 21 year limit?  What if the tax savings of a testamentary trust in the long run are far greater than the capital gain to be realized on the 21 year deemed disposition?  In these two examples, why would someone want to lose the tax savings and income splitting opportunity simply to avoid a small capital gain, if any?

As an aside for estate matters, it is important to know that the 21-year deemed disposition timeline commences at the death of the testator/settlor and not on the day the residual beneficiary receives his or her share in a testamentary trust.

Conclusion

We can see that a trust may be viewed as a vehicle that provides a 21-year window of tax opportunities.  The 21-year deemed disposition rule ought to be reviewed and fully understood by any trustee of a trust; whether a family trust, a testamentary trust, an alter ego trust, a spousal trust, etc., in order to take advantage of those opportunities and realize the maximum benefit from a trust.

If you have any questions concerning the 21-year deemed disposition rule or concerning trusts in general, please do not hesitate to contact me directly 613.288.3220 or by email at sdesmarais@tslawyers.ca

Sébastien Desmarais
Lawyer

 

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

Estate Planning and the Use of the Henson Trust and RDSP

Many families include a disabled child or adult and the parents are usually the child’s primary safety net. The onus is on the parents (or parent as the case may be) to provide core support to their children whether financial, physical or emotional and the list of duties for the disabled child may well escalate to a point where many are overwhelmed.

The Ontario government can assist by offering a variety of valuable services that will assist the disabled child and his or her family.  In Ontario, one can turn to the Ontario Disability Support Program (ODSP) which was established to help people with disabilities in financial need pay for living expenses such as food and housing.

Given the circumstance a child’s disability will require lifelong treatment and support, a great concern for their parents is how to effectively plan for the care and protection for their child after the parents are no longer living.  In fact, special considerations are necessary for parents of a disabled child or adult to ensure the child’s ODSP’s benefits are not compromised by their estate planning. This is a situation where guidance from a professional advisor could provide great benefit.

The Smith Family

As an example of an estate planning strategy involving a disabled child, I introduce the Smith family.

The Smiths have two children, Corey and Ryan, who are both over the age of majority. Ryan is a disabled child who receives ODSP benefits. The Smiths’ combined Estate consists of their principal residence, RRSPs and other investments for a net value of $1,000,000. 

The Smiths are making their Wills and although they wish to have their Estate distributed in equal shares between their children their primary concern is to ensure that their estate planning does not disqualify Ryan from his ODSP benefits. They know the ODSP rules are complex.

What options are available to them?

Henson Trust

The popular and preferred option is the use of an Absolute Discretionary Trust (commonly referred as a “Henson Trust”) created under the parents’ Wills. The Henson Trust allows their Estate Trustee, Corey, complete discretion over the trust so that he may continue to pay the necessary expenses of the disabled child. As a result of the Henson Trust, the Smiths have the assurance that Ryan shall be provided for in the years to come while knowing that he cannot compel Corey to make payments.

Ryan’s ODSP benefits shall not be compromised since the funds held in the Henson Trust are not considered his assets for ODSP purposes; that is because Corey, as Estate Trustee, has absolute discretion in the management of the trust.  Furthermore, Ryan’s income from the Henson Trust for non-disability related expenses, such as food, clothing, housing and entertainment, can be substantially supplemented without suspending or affecting the ODSP benefits. 

Also, depending on the parents’ wishes and in appropriate circumstances, the Henson Trust may also allow for income sprinkling by empowering the Trustee to “sprinkle” income among several beneficiaries.  

ODSP guidelines recognizes the Henson Trust as an exempt asset of the disabled child and as a result, it remains the most valuable option available as it represents a safety net for Ryan after the death of his parents. 

Registered Disability Savings Plan

The Registered Disability Savings Plan (“RDSP”) was introduced in December 2008. The RDSP allows for a combination of individual, family and government financial assistance contributions to assist people with disabilities to grow, manage and control a financial asset. 

To open an RDSP, one must qualify for the Federal Disability Tax Credit (DTC).  If a child or grandchild qualifies for the DTC the parent, grandparents or other legal representative may establish and contribute to an RDSP up to a lifetime maximum of $200,000.  The DTC-eligible person shall be the sole beneficiary of the RDSP.

As a result of opening an RDSP, annual contributions will attract:

• Canada Disability Savings Grants (CDSGs) at a matching rate of 100, 200 or 300 percent depending on the family income and the amount contributed up to a maximum lifetime CDSG limit of $70,000; and

• Canada Disability Savings Bonds (CDSBs) of up to $1,000 per year for low and modest-income families[1] for a lifetime maximum of $20,000. 

The most obvious thorn in establishing an RDSP is the matter of capital contributions (which are not deductible) as not everyone is in a position to fund such a plan. One strategy is to insert a clause in the parents’ Wills instructing the Estate Trustee to fund the RDSP with the disabled child’s share. 

The RDSP, like the Henson Trust, is an exempt asset for ODSP purposes and therefore the benefits of the disabled child contained therein will not be compromised.

The 2011 Federal Budget addressed the difficulty of funding an RDSP by creating a new funding option permitting conditional rollovers of RRSPs into RDSPs. Indeed, as of July 1, 2011, for deaths occurring after March 3, 2010, one may now roll the deceased parent’s RRSP proceeds into the RDSP of the disabled child on a tax-free basis.  This new rule extends to amounts transferred to an RDSP from the proceeds of a Registered Retirement Income Fund (RRIF) and certain lump-sum amounts paid from Registered Pension Plans (RPP). 

Ideal Estate Planning for the Smiths

The Smiths now have two valuable options available to them where they can provide for Ryan with the assurance that his ODSP benefits will not be jeopardized.  Their Wills could provide that their RRSPs (or a portion of them) be rolled into an RDSP on a tax-free basis.  If there is still “room” in the RDSP (that is if the RRSPs have not reached $200,000.00), then their Wills may also provide for a portion of Ryan’s share in the Estate to be paid into the RDSP up to the threshold value.  The remainder of Ryan’s share in the Estate shall be transferred into a Henson Trust for his benefit.  Corey would be the Trustee of the Henson Trust and would administer the trust for Ryan’s benefit. 

If the Smiths each maintained a modest life insurance policy (of $50,000 for example), they could name both of their children as alternate beneficiaries (the surviving spouse would be the first named beneficiary). If that is the case, Ryan and Cory would both receive $50,000.  In such instance, a life insurance trust could be created in which he would deposit the life insurance proceeds. Such a life insurance trust has a threshold of $100,000.

The proceeding examples explain how the Smiths are able to provide for Ryan without compromising his ODSP benefits through careful estate planning. 

Cautions

There are drawbacks to both a Henson Trust and RDSP that ought to be considered.  We recommend you consult with a professional so that those drawbacks be clearly highlighted and discussed. Ultimately, the estate planning must be tailored to the circumstances and the parents must decide what is feasible given their intentions and their means and the size of their family.

Conclusion

From the foregoing one can appreciate the tremendous advantage of Ontario parents having effective Wills in place is underscored when their child is disabled. The impact on that child’s future may be profoundly affected for the better.

If you have any questions, please do not hesitate to contact me directly 613.288.3220 or by email at sdesmarais@tslawyers.ca

Sébastien Desmarais, Associate

 

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

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[1] When the household net income is under $21,816.00.

Minimize Tax Implications and Increase Estate Value with Life Insurance

The best way to increase the value of your estate is to minimize the tax implications arising on your death. On that basis, because of the potential tax savings, life insurance policies are useful estate planning tools that ought to be considered when planning your estate. 

Tax Benefits

One of the greatest benefits of life insurance is that, upon the death of the insured individual, it provides a tax-free lump sum payment directly to the designated beneficiary(ies), tax free.  Consequently, the insured individual knows that he or she provided protection and financial security to his or her surviving spouse or his or her surviving dependents.

Another reason to consider life insurance in the context of estate planning is estate preservation.

The Income Tax Act provides that a deceased taxpayer is deemed to have disposed of each capital property owned by him or her immediately before death for proceeds equal to the fair market value at that time.  For tax purposes, that signifies a deemed a capital gain will be realized upon death. In this context, life insurance may be purchased to provide the necessary funds to pay the capital gain, thereby preventing the beneficiary(ies) of the estate from having to sell some of the assets to pay for the taxes.  

Since the proceeds of the life insurance are paid directly to the designated beneficiary(ies), they do not form part of the estate and, as a result, probate tax is saved on that amount. It may be advantageous to transfer cash into life insurance and designate a beneficiary(ies) to avoid probate tax being levied on the value of these assets in the estate.

Life insurance should be considered a valuable estate planning tool as it can be cost efficient and will allow the insurance proceeds to be received tax-free by the designated beneficiary(ies).

Testamentary Insurance Trusts

There has been much debate as to whether one’s life insurance proceeds should be paid to their estate or to designated individual beneficiaries.  Fundamentally, the issue is whether the proceeds are to be paid to a designated beneficiary, thus avoiding probate tax, or paid to the estate in order to take full advantage of the graduated tax rates available to testamentary trusts on the income generated after death by the insurance proceeds.

The testamentary insurance trust may ultimately be the solution to that debate as it allows for funding of a trust using insurance proceeds such that the trust will also qualify as a testamentary trust for tax purposes.  It is important to ensure that the parameters of the testamentary insurance trust have been established prior to death in the deceased’s will in a manner intended to avoid probate tax. Also, care must be taken to ensure such trust meets the definition of a testamentary trust and that it comes into effect in such a way so as to avoid probate tax.

If structured properly, the estate will avoid paying probate tax on the proceeds of the life insurance while the beneficiaries will benefit from the graduated tax rates of the testamentary trust on the income generated by the insurance proceeds. This arrangement may translate into considerable tax-savings for the beneficiaries.

Sebastien Desmarais

Lawyer