Depending on one’s stage of life, there are different planning tools available to protect assets and plan appropriately for our families. Earlier in life, dual wills or inter-vivos trusts can provide some unique opportunities. Later in life, alter-ego and joint-partner trusts are excellent estate planning tools. Benefits range from probate savings to protection from wills variation litigation. However, they must be administered properly to work.
Contemporary estate planning for those over 65 often includes the use of an alter-ego trust (one person) or joint-partner trust (marital or common law partners). In this CVTrustco post we refer to both as a Trust.
In simple terms, Joe, in his 70’s, transfers his assets – maybe an investment portfolio, maybe operating company (Opco) shares – with a $5M value to a Trust for him and his spouse, Mary. During their lifetimes, only Joe and Mary can receive Trust income and Trust capital. If the only property in the Trust is Opco shares, income will likely consist of Opco dividends and the capital will consist of Opco shares. If a portfolio, income could be a combination of interest, dividends and capital gains and capital could be cash or portfolio shares. Whatever income is received by the Trust is paid to Joe and Mary, and this income is included in their personal incomes.
If Joe is the first to die, his death will have no effect on the Trust. On Mary’s death, the Trust will be deemed to have disposed of its assets at their then fair market value. The disposition of the Opco shares or portfolio will be as Joe and Mary wished, as documented in the Trust deed.
The Trust can have significant benefits, but only if adequate compliance steps are followed. This CVTrustco post outlines the benefits, the additional compliance steps and where the Trust plan can fall short.
Benefits of a Trust
There are 4 primary benefits:
Privacy – the Trust is a private document whereas a will is a public document.
Probate fees – Joe has transferred his assets to the Trust during his lifetime. On his death, Joe does not own the assets, the Trust does. Probate savings could be $70k (at $14 of tax for each $1,000 of value and a $5M value).
Litigation risk – again, Joe does not own the assets. If Joe’s child argues unfair treatment in Joe’s will, the relevant assets should not be subject to wills variation. Joe and Mary, through the Trust, are able to deal with their assets as they wish.
Tax treatment – The transfer of any assets to the Trust is tax deferred and any gain on those assets is deferred until the later of the demise of Joe and Mary, similar to a will with a spousal trust.
As part of the plan, Joe transfers his assets to the Trust. As he no longer owns these asset and the Trust does, bankers and others need to be aware of this new ownership arrangement. Joe and Mary need to treat the assets as Trust assets rather than personal assets.
From a tax filing perspective, there is a new taxpayer, the Trust, which may not have any taxable income, but should still file an annual return.
Where can it all go wrong?
Trusts are often put in place and then ignored. If the primary purpose of the Trust is to minimize litigation risk, make sure the Trust is administered properly including:
- Time to mature. Putting a Trust in place at the last minute is far inferior to a Trust that has been in place for a number of years.
- Have a Protector for the Trust who has the ability to appoint and remove trustee(s). In our case, Joe could be the Protector and have the ability to appoint trustees(s).
- Consider independence. Joe as Protector could appoint himself as a trustee and he should also consider another trustee independent from him and Mary. The independent trustee would help to ensure that the Trust is administered properly. It’s not only Joe as trustee, but Joe and a second set of eyes.
- Have a separate bank account for the Trust. Often an account is initially set up, but ignored in the future. Don’t use a personal bank account to deposit funds and pay bills, thereby ignoring the Trust. Use the Trust’s bank account like Opco would uses its bank account.
- Have quarterly or annual meetings of the Trust’s trustee(s) with minutes prepared and signed. These meetings should deal with the distribution of the Trust’s income and capital distributions, expenses of the Trust, etc. These meeting should be no different in procedure than Opco’s directors meetings.
Ignoring the Trust as a separate entity could lead to the Trust being ignored or looked through in a litigation context.
At CVTrustco, we believe that Trusts are an excellent estate planning tool. Administered properly, the benefits are incredible. Not administered properly, who knows . . .
CrossonVoyer Trust Company brings an independent and informed perspective on trust and estate planning combined with the security of a regulated trust company.
CVTrustCo’s team of seasoned professionals work with you and your advisors to design and execute a tailored estate plan. CVTrustCo provides a range of fiduciary services and can act as the executor and trustee of your legacy, carrying out your estate plan as you intended.
The result: you will have a clear understanding of your options, a practical plan for your legacy, and the security and reliability of a financial institution acting as your power of attorney, executor and trustee.
Our estate planning posts consider estate planning issues at a high level. Before you commence any form of estate planning, please consult with tax and legal advisors