All I Need is A Simple Will…Or do I?
A simple will may be all you need, but a little bit of complexity through the creative use of trusts can save your estate some money and give you peace of mind.
Delayed Distribution Trust
The most commonly used will trust is the “delayed distribution” trust for children. The age of majority in Ontario is 18. If you leave your estate to your children, they will be entitled to receive it when they reach that age unless the assets are left to a trust and the will specifies a distribution age which is greater than 18.
Usually, the trustee is given the discretion to encroach on capital and income for the benefit of the children so the money is available if the trustee determines that the intended use is worthwhile.
Those of us who can remember what we and our friends were like in our late teens can probably appreciate the merits of this type of trust. It allows you to make sure that your children’s needs are attended to while ensuring that the opportunity to blow the money is deferred for a few years. (Hopefully maturity and common sense kick in the meantime.)
Trusts can also be used to save money for your estate and beneficiaries.
Many of us were very interested to hear of the Supreme Court of Canada decision several months ago, which decreed that probate fees charged by the Government of Ontario were illegal. Alas, the Government has taken steps to retroactively legalize the fee, or tax as it is now called.
Probate taxes are calculated at the rate of .5% on the first $50,000.00 and 1.5% on the balance of the gross value of an estate. The only deduction for debts, are mortgages on real estate.
Trusts can be used to avoid probate taxes in several ways. Here are two examples.
In these days of two income households, it is not uncommon for both working spouses to carry substantial amounts of life insurance. More often than not, each policy names the spouse as beneficiary. Insurance payable to a named beneficiary is not subject to probate taxes. If however, both spouses die at the same time, or in circumstances where it is not clear which one survived the other, the life insurance will flow into the estate of each insured. It will become subject to probate taxes (and also become available to satisfy the claims of creditors of the deceased).
This result can easily be avoided by creating an insurance trust in a beneficiary declaration. The trustee of the will can be named as trustee of the insurance trust, and its terms can mirror the provisions of the will, including of course the delayed distribution provisions mentioned above.
Trust in the Will
Probate taxes can also be avoided through use of trusts in the will itself. If one spouse survives the other for a relatively short period of time, the assets inherited from the deceased spouse will be taxed again when the second spouse dies.
If however, the assets are left to a trust for the second spouse, the will can be drafted so that the surviving spouse has access to the capital and income of the deceased spouse’s estate while ensuring that those assets will not be subject to a second set of probate taxes when the surviving spouse dies.
Income taxes triggered by death can of course be substantially more costly than probate taxes. Trusts can also be used as an effective tool to allow your beneficiaries to keep the income taxman at bay. The trustee of a “discretionary” trust is given discretion to sprinkle income or capital among a number of different named beneficiaries, who might include the surviving spouse, children and grandchildren.
Surplus income not required by the surviving spouse can be paid out to beneficiaries who are in lower tax brackets. The income paid out in this manner will be taxed in the hands of and at the marginal rates of the recipients. It is possible to shield thousands of dollars of income from any tax at all in this manner while at the same time ensuring that the varying needs of the beneficiaries are met.
The “Henson” Trust
It is possible to use a variation of a discretionary trust (called a “Henson” trust after the Court of Appeal case which established its validity) to ensure that disabled beneficiaries, who rely on government social assistance, are not deprived of that assistance by virtue of becoming a beneficiary of an estate.
The trust is but one tool that can be used to enhance peace of mind and save money in conjunction with estate planning. If you do not have a will, or if you have a will which is more than five years old, we encourage you to contact either Stanley Landau or Howard Steinberg for an estate review.Share