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ESTATE PLANNING: Two trust solutions

Updated: Mar 29

Trusts offer one of the most useful legal solutions to special estate planning situations. A “trust” is a legal tool that separates legal and beneficial ownership: a trustee holds assets for the benefit of one or more people, for a specific purpose.

1. Testamentary trusts

A testamentary trust is created in your will, comes into effect only once you have died, and can help you protect your loved ones and your assets after your death.

Minors, spendthrifts, and capacity issues

It’s important to ensure that any inheritance you leave to minor children is left in a trust (often, a testamentary trust) so the assets are available for their benefit until they reach an age at which they can manage them on their own. A testamentary trust can also protect assets: from adult beneficiaries who need help managing money; where beneficiaries are disabled or have capacity issues; or from an adult child’s relationship breakdown and creditors.

Blended families

Spouses can create special testamentary trusts to benefit each other, allowing for deferral of capital gains tax for assets transferred into the trust until the surviving spouse’s death. This can be particularly useful in a second marriage or blended family situation, where it’s important to one spouse to maintain control over the ultimate disposition of assets after their own death. For example, you might leave your assets to your second spouse in trust, with the assets going to your children from your first marriage after your second spouse’s death.

Tax benefits

Testamentary trusts can enable your beneficiaries to income-split with low- or non-income-earning members of their own families, which can represent significant tax savings. For example, you leave assets to your adult child in a trust for their benefit and the benefit of their own children; your child can use income generated in the trust for their children’s benefit, which is then taxed in your grandchildren’s hands, minimizing the tax payable on it. If you leave your adult child everything outright, without a testamentary trust, all the income the inheritance generates is added to your child’s income and taxed at their higher graduated rate.Testamentary trusts can enable your beneficiaries to income-split with low- or non-income-earning members of their own families, which can represent significant tax savings. For example, you leave assets to your adult child in a trust for their benefit and the benefit of their own children; your child can use income generated in the trust for their children’s benefit, which is then taxed in your grandchildren’s hands, minimizing the tax payable on it. If you leave your adult child everything outright, without a testamentary trust, all the income the inheritance generates is added to your child’s income and taxed at their higher graduated rate.

2. Inter Vivos trusts

An inter vivos, or “living,” trust is created during your lifetime. Alter Ego and Joint Partner trusts are two of the most useful forms of inter vivos trusts to add flexibility to estate planning, and they can help achieve personal planning objectives through any future incapacity and beyond. Only you (or your spouse or partner) are entitled to the trust assets and income they generate during your lifetime. On your death (or, in the case of a Joint Partner trust, the death of the last to die), the remaining capital is distributed to your chosen beneficiaries, which, with proper planning, could be coordinated with your will. You can consider using an Alter Ego or Joint Partner trust as part of your estate plan if you satisfy certain conditions. There are a number of additional key benefits to using an Alter Ego or Joint Partner trust as part of an estate plan:

Tax deferral

You can transfer the assets into the trust on a tax-deferred basis during your lifetime.

Probate avoidance

Assets in an Alter Ego or Joint Partner trust won’t form part of the assets of your estate under your will, so upon your death, the trustees won’t need to obtain probate to administer the trust assets or to transfer them to your beneficiaries. Avoiding probate avoids the associated probate taxes on the trust assets, its public nature, and the potential delays and costs of any court process.

Continuity of asset management

The trustees can continue to manage the trust assets in the event of your incapacity.

To discuss this or any other legal issue, contact any member of McInnes Cooper’s Estates & Trusts Team. Read more McInnes Cooper Legal Publications and subscribe to receive those relevant to your business.

This article is information only; it is not legal advice. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2022. All rights reserved.

 



Sheri Wicks is a commercial lawyer in McInnes Cooper’s St. John’s office. She counsels business owners on issues ranging from general corporate matters and commercial and civil litigation, including shareholder disputes and directors’ liability issues, to wills and estates, including succession planning.


Contact Sheri at sheri.wicks@mcinnescooper.com or 709.570.7360.

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