Estate planning with trusts

Clients frequently place estate planning on the back burner for many reasons. Sometimes, it’s because they don’t want to face their own mortality; some simply don’t consider it to be a priority.

No matter the reason, it’s important to advise your clients to have a will; otherwise, they’re considered to die intestate, and the province determines how their estates will be distributed.

A will is especially important if your client wishes to establish a trust after their passing, because this must be included in their will. A trust can be an excellent estate planning tool, which many Canadians have incorporated.

Do you have clients with minor children who will inherit assets upon their parents’ passing? A minor cannot directly receive an inheritance. If no trust is included in the deceased’s will, the court will appoint a guardian for property to act on behalf of the beneficiary and manage the inheritance until the child reaches age of majority. At that time, they may not be financially wise enough to deal with a large sum of money.

To establish a formal testamentary trust, the deceased’s will must have a clause instructing that a trust be set up. This allows the deceased to essentially control the assets from the grave. For instance, they can indicate how much the beneficiary is to receive from the trust on a monthly, quarterly or annual basis. They can indicate when the beneficiary will gain access to the funds; for example, the beneficiary could receive a certain amount at age 25, another chunk at 30 and the balance at 35. This provides the testator peace of mind that the inheritance will not be depleted too quickly.

Using trusts in estate planning benefits other individuals as well. If your clients have someone in the family who is a spendthrift or has dependency issues, a trust can be beneficial to them because it protects the inheritance and ensures it is not used frivolously.

However, trusts are often set up as fully discretionary, where the trustee determines what is paid to the beneficiary and when. This puts the trustee in a difficult position, especially if the beneficiary is related to them — a sibling, for example.

If your client is concerned about issues arising between siblings if one is the trustee of a discretionary trust, you may want to discuss the opportunity to use a corporate trustee rather than a sibling. The corporate trustee would be responsible for determining when payments are made to the beneficiary.

Another option would be for the testator to set up a fixed interest testamentary trust and indicate in their will how much — and at what frequency — money should flow to the beneficiary, leaving no discretion to the trustee. This can be helpful because it does not put the onus on the trustee to determine when to flow money to the beneficiary.

Another use for trusts is if you have clients who are planning for an heir with a disability. They may want to consider including a Henson trust in their will. This fully discretionary trust can be a great estate planning tool because it allows a disabled beneficiary to inherit assets in most cases without affecting their eligibility for provincial disability benefits.^*

With a Henson trust, the trustee determines when the beneficiary receives the money. It’s important for the trustee to understand how much money can flow from the trust without affecting the beneficiary’s provincial benefits. If the trustee flows too much, some or all provincial benefits could be clawed back. For example, if the beneficiary is currently receiving Ontario Disability Support Program (ODSP) payments, the maximum they can receive from the trust for non-disability-related items is $10,000 in a 12-month period. If they exceed this limit, the ODSP payments they receive will be reduced.

Another benefit of having assets in a trust is that creditors of the beneficiary cannot seize these assets, as they’re held by the trustee, and the beneficiary does not have legal title to the assets. This can also be helpful if a trust beneficiary’s marriage breaks down. The trust assets are not included in the family property calculation, whereas they may be included if the individual held those assets personally.

It’s important to know there were changes to the taxation of testamentary trusts beginning in 2016. Prior to 2016 any income retained in the testamentary trust was taxed at graduated tax rates. As of 2016, income retained in the trust is taxed at the top marginal tax rate, with the exception of graduated rate estates and qualified disability trusts that can still access graduated tax rates. Generally, the trustee will flow income from the trust to the beneficiaries, so it is taxed at their graduated tax rates rather than the top marginal tax rate in the trust.

Given the many benefits, consider speaking with your clients about trusts when you discuss estate planning with them.

Jacqueline Power is an assistant vice-president with Mackenzie Investments. She can be reached at jpower@mackenzieinvestments.com.

* While most provinces do not count assets in the Henson trust toward the asset test for provincial benefits, the Northwest Territories and Nunavut do not recognize the Henson trust. And in Saskatchewan, it may be challenged by the government based on dependant relief legislation, but there haven’t been any cases yet.

Jacqueline Power

Tax & Estate

Jacqueline Power is an assistant vice-president with Mackenzie Investments. She can be reached at jpower@mackenzieinvestments.com.