Trusts and estate planning
The use of trusts seems to be expanding in our contemporary and complex society where solicitors are constantly looking to create legal infrastructures to meet different needs of their customers. The trust has the advantage of offering flexibility that corporations cannot compete with due to the heavy legislation governing their operations. It is neither appropriate, nor is their space in this short paper to review the many uses related to trusts, therefore, we will concentrate on the utilisation of trusts in the area of succession planning.
One of the most popular uses of trusts is to insure the welfare of spouses, common law partners and children. The major advantage of the partner trust is the ability to transfer property tax-free. To be able to benefit the tax concessions the trust must comply with several conditions including that the terms of the trust must provide that throughout the life time of the beneficiary, all the income of the trust be paid to the partner and nobody else may encroach the capital.
Another frequent use of the trust for succession planning purposes, also related to tax reduction is the estate freeze. This use is common in the corporate field and allows older generations to transfer shares of a given company to the younger generation without tax liabilities. In practice the solicitor will draft a discretionary trust under which the younger generations are beneficiaries and the trustees will subscribe for growth (common) shares to their benefit. The older generation will usually trade their common shares for preference shares which will allow them to retain the control of the company.
An inter vivo trust, or testamentary trust may also be selected for charitable purposes. To be able to claim a charitable tax credit the CRA requires that the terms of the trusts do not provide a power of encroachment, to be irrevocable and that the interest of the charity must vest at the time the property is transferred to the trust.
A trust can also be an excellent mechanism to impose conditions on the enjoyment of property and for the testator to have a long reaching hand from his grave. This ability is by some means limited by certain doctrine as uncertainty, repugnant to the interest given or against public policy.
Trusts are useful instrument to allow one to isolate property from creditors. These 3rd party claims may arise from the beneficiary’s creditors, from dependents if adequate provision for their proper maintenance and support is not provided in the will (dependents’ relief legislation), and from the surviving spouse under matrimonial property legislation. The settler must beware of bankruptcy and fraudulent conveyances statutes that allow claw back mechanisms.
Often, trusts are used as a substitute for a Power of Attorney who has indeed some fiduciary duties towards the donor but does not have the legal capacity to dispose the donor’s capital even if it is for his benefit. Therefore, a discretion trust may be the best option for a person who anticipates the aging process.
Trusts may be constructed in a way to provide for beneficiaries with disabilities without jeopardizing government benefits. To reach this result, the term of the trust must give absolute discretion to the trustee and remove the funds from the reach of the beneficiary.
Finally, in all Canadian provinces probate fees are applied to the transfer of property under a will. A trust can be used to bypass this process and to avoid fees along with the non- desirable public probate process.