Trusts and Estate Planning
A trust has the effect of separating the legal and beneficial ownership of property and is a great tool to utilize in estate planning. Generally speaking, a trust is an obligation binding a person (a "trustee") to deal with property over which he or she has control (the "trust property") for the benefit of others ("beneficiaries"). With the exception of insisting that the trustees adhere to their responsibilities under the trust, the beneficiaries have no power or rights over the trustees.
Should a trust be expressly created through the use of a legally binding trust agreement, in order for it to be effective, it must have three essential characteristics:
- the language used by the creator of the trust (the "settlor") must illustrate their intention to establish a trust;
- the subject matter or property of the trust must be certain; and
- the objects or persons intended to have the benefit of the trust must be certain.
Trusts may be revocable or irrevocable by the settlor. A revocable trust is one that, by its terms, may be revoked or amended and the property comprising the trust may be returned to the settlor. In the alternative, an irrevocable trust cannot be amended or revoked by the settlor.
Some examples of some of the more common uses of trusts in estate planning include:
- providing for maintenance and education of minor children or other persons to whom it is desired to give the property to, without powers of control or management;
- providing for a level of financial independence for an adult child while delaying the time at which the child may gain full management or control of the property; and
- implementing tax planning objectives.
To plan your estate is to define how you want your assets to be owned, managed and preserved during your lifetime and how you want them to be given after your death. Regardless of what age you are or how much money and assets you may possess, an estate plan is a highly beneficial undertaking. It can reduce the taxes and expenses of your estate, simplify and speed up the transfer of assets to your beneficiaries and ensure that your beneficiaries are provided for financially. For example, where your estate consists of capital assets such as stocks, bonds, mutual funds, rental properties or other commercial real estate, or any other complicating factors such as family cottages or businesses, the process of estate planning can minimize certain expenses of the estate, such as probate fees and income taxes. Good estate planning can also help avoid disputes among your surviving family members and save unnecessary legal and accounting costs. This results in a greater portion of your estate assets being made available to your beneficiaries.
The future success of your family business requires careful planning. Statistics show that only 30% of all family businesses are carried on by the second generation and only 10% survive to the third generation. A well laid out estate plan will ensure that your wishes are observed. It spells out the steps for a smooth transition in management and continued operation of the business. It will also help reduce the tax burden that could threaten the business.
Some of the issues you must deal with include succession planning and implementation, strategies to minimize taxes, ownership transition and selling the business outside the family. Family businesses are unique because they must deal with the dynamics of family relationships, which sometimes involve conflict between generations and/or rivalry between siblings. Your estate plan can indicate how disputes are to be resolved, which may make provision for mediation.
You should advise your appointed Estate Trustee and all of your family members who are or will be involved in the business of your plans. This will minimize the risk of a court challenge. One of our experienced lawyers can help you develop and properly execute an estate plan that will help to prevent discord within your family and protect your business for future generations.
The process of applying for probate, or as it is now called, a "Certificate of Appointment of Estate Trustee", confirms the validity of a will and the appointment of the Estate Trustee. Estate administration taxes are based on the value of the estate and charged when the will of the deceased is submitted to the court for confirmation of the Estate Trustee appointment. There are certain assets which are excluded and not subject to estate administration tax. For example, real estate situated outside of Ontario and insurance proceeds or registered funds passing to a named beneficiary are not included when calculating the value of the assets for the purpose of estate administration tax.
Once appointed, one of the responsibilities of an Estate Trustee is to ensure that any income tax owed by the deceased person, at the time of death, is paid. The Estate Trustee must ensure that the final tax return of the deceased for the period between January 1 and the date of death is prepared. This final tax return reports any employment income, investment income and pension income, as well as income specific under the Income Tax Act for the submission of a final tax return.
The tax consequences upon death can be substantial if certain kinds of assets were held by the deceased at death. Good preparation of final tax returns and proper tax advice can result in significant income tax savings at death.
If you are contemplating making a will, you should consult an experienced estate lawyer to advise you. If you find yourself named as the Estate Trustee of someone who has passed away, good legal and accounting advice as soon as you become aware of your duties may save the estate unnecessary expenses.