When estate planning, there are a number of avenues that can be taken by an individual in conjunction with their legal counsel, accountant and possibly their financial planner.
In other areas of our website we discuss wills, estates and power of attorney. Another estate planning vehicle that could be considered is a trust. There are a number of scenarios where our trustee services can be used and each has a different purpose.
The testamentary trust is a trust set up under the will and can be used for holding funds for a minor beneficiary, or an individual that may not be capable of handling their own funds. Also the individual drawing the will (testator) may not wish to pay out all the funds from his or her estate until a set period after their death.
An inter-vivos trust is created by the donor who is still alive to hold property for the benefit of another. The donor may wish to set funds aside for a beneficiary(ies). The donor may not wish for other beneficiaries to know of assets that have been given to the beneficiary under the trust. The assets in the trust do not fall into the estate upon his or her death.
The donor, who is called the settlor, agrees to put certain assets into the trust and outlines the terms and conditions of the trust, who benefits from them (beneficiary), and who will hold the assets in trust (trustee).
The settlor is deemed to have disposed of the assets when placing them in the trust and so should be aware that capital gains may be payable on any increase in value since the date of purchase, unless an exemption such as the principal residence capital gains tax exemption is available.
There will be a cost of setting up the trust as well as an on-going cost so careful consideration should be given prior to setting up the trust.
Two other types of trusts can be set up by individuals 65 and older. These are the Alter Ego Trust and Joint Partner Trust.
The Alter Ego Trust allows a single individual to transfer property into the trust without necessarily having the payment of capital gains tax. Upon the death of the settlor there is a deemed disposition of the assets and capital gains tax may be payable unless other exemptions are available. In order to qualify for the capital gain exemption, certain legal formalities must be observed. For example, the settlor must be entitled to all the income generated by the trust during his or her lifetime.
The Joint Partner Trust is similar to the Alter Ego Trust in that no capital gains tax will be payable as long as the proper legal formalities are observed. In this situation the deemed disposition will be on the death of the last to pass. The funds from the trust can only be paid to the settlors during their lifetimes.
Prior to entering into such an arrangement legal counsel should be sought to ensure the documentation is in order and the individuals understand the cost of setting up a trust, and they are doing this for the right reasons. These products are not for everyone. CWTC can be of assistance in discussing these with you and can act as trustee for the trust.