Ensuring that your wealth carries on to the next generation – and that any special wishes and circumstances are taken care of – is all part of estate planning. Incorporating trusts into your will can ensure that this happens most efficiently and effectively.
Done right, a trust can ensure that all goes smoothly upon your death and that “your heirs and family members don’t wake up with surprises afterward,” says George Angelopoulos, a vice-president at Richter LLP who specializes in tax and estates advisory. He is based in Montreal.
A testamentary trust, as it’s called, is part of a will. There can be more than one of these, and in some cases a testamentary trust can continue on into the next generation.
Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management in Toronto, says that both testamentary and inter-vivos trusts, which take effect during the lifetime of those creating them, can be used to control distributions to beneficiaries after death.
“While they are alive, they can do a lot of sophisticated planning,” he says.
One of the most common testamentary trusts involves protecting family inheritances, he notes, especially if there are concerns that your spouse might remarry and that your money will go to his or her new spouse, stepchildren or kids from the second marriage. A spousal or partner trust can leave income from the estate or certain assets like the family home or cottage to your spouse (or second spouse) for use in his or her lifetime, and then it can revert to your kids from a previous relationship upon death.
Trustee controls timing, amount
Trusts can cover bequests to minor beneficiaries and include the appointment of someone to manage the funds on behalf of the child until he or she reaches age 18 or 19 (depending on the province), or even a later age. A trustee can control the timing and amount of distributions to beneficiaries. A testamentary trust can declare that half of a child’s inheritance can be distributed at the age of 30 and the rest at 40, which is especially helpful for those who might be spendthrift, incapacitated or incapable of managing the funds themselves.
“You can even provide trustees with the flexibility to allow for changes in the amount and timing of distributions, or perhaps even which beneficiary to pay to,” Golombek says.
We use a trust when we don't trust the person we want to leave the money to. We want some level of control.Jamie Golombek, CIBC Private Wealth Management
Serious situations where there is a family member with a disability or addiction issues can also be covered, so the person does not receive all the funds directly or all at once, he notes. “You can also encourage things like going to school, by setting up a trust for funding education.”
A person who has died, called a testator, can speak from the grave through these kinds of arrangements, which Golombek says can get quite creative. “We use a trust when we don’t trust the person we want to leave the money to. We want some level of control.”
He says, for instance, that a “matching incentive trust” can be used to motivate behaviour. It can specify that in order to receive $50,000 of income annually from the trust, a beneficiary must be able to demonstrate that he or she has earned at least $50,000 of income that year.
Trust can require prenups
Peter Weissman, a tax accountant and partner at Cadesky Tax in Toronto, has heard of people who set out conditions that in order to have education paid by a trust, a certain grade-point average must be maintained.
“You can pick whatever terms you want. Whether they’re fair or reasonable, that’s a different story,” says Weissman, who is chair of the public policy committee of the Society of Trust and Estate Practitioners (STEP) Canada. “It’s really whatever the person creating the trust wants to do.”
He says, for instance, that in many wealthy families, children can feel uncomfortable about asking for pre-nuptial agreements with prospective spouses. So he suggested that a client add a condition in a trust that his children could not receive funds from it unless they had domestic contracts in place excluding the trust assets from their family property.
The worst strategy for coping with blended families: Hope it goes well
How three generations pulled Harry Rosen through the pandemic
“If you build in the condition in the trust … it makes the discussion easier, because you blame it on the accountant or lawyer that set it up,” Weissman says, noting that such conditions can be part of both inter-vivos and testamentary trusts, so they extend far into the future.
He notes that people who are concerned they may decline cognitively as they age can put assets into trusts. It’s also possible to cover future eventualities, like grandchildren and great-grandchildren. “They can define the terms and all of those things while they have capacity,” Weissman says.
He notes that as time goes on, trustees may need replacement as they themselves develop cognitive issues or even die. They might also go bankrupt, meaning they can no longer act as trustees.
Entrepreneurs need to exercise care
Developing a “second line of trustees is often where you get into the difficult decisions, and a bit of uncertainty,” Weissman says. “We spend a lot of time figuring out what the rule book is and trying to get it right at the beginning.” A trust can include a clause saying it can be changed, but amending trust terms can often trigger tax consequences, “so you do so at your own peril,” he warns.
Angelopoulos says that trusts in estates involving business people can be tricky. Entrepreneurs should remain mindful of the “segregation between what’s theirs and what’s the trust’s,” he suggests. Understanding what belongs to whom and what each person or entity can do is critical when there are perhaps different trusts, a will that dictates certain distributions as well as a shareholder agreement in the picture.
“The biggest pitfall from a business standpoint that we tend to encounter is that those documents don’t speak to each other,” Angelopoulos says. “And then when you get to the person passing away, all of these documents come to life and … the right hand is not speaking to the left hand.”
He says it’s important to ensure there is “perfect synergy” between the different parts of the estate and that “no ambiguity or contradictions” exist. This synergy is best achieved by a person’s advisers working together, including the estate, family and corporate lawyers, accountants, tax, insurance and financial advisers.
Finally, a trust can provide confidentiality on your death, although this applies only to inter-vivos trusts, which are not part of the will, notes Golombek. People might elect to place their assets in such a trust because they want the privacy of avoiding probate, which is a public process in most provinces, with the nature and value of assets available for anyone to see.
Because they are not part of the estate, he adds, the assets in an inter-vivos trust may also not be subject to probate fees and estate administration costs.
Get the latest stories from Canadian Family Offices in our weekly newsletter. Sign up here.