This is our latest blog posts in our series dedicated to estate planning. Last week we introduced the idea of using trusts as estate planning tools. Although trusts can be used to save on probate, there are other lesser-known uses. This week we’ll continue along that theme. Here are several more common uses for trusts in your estate.
As a substitute for a will
In the year 2000 we celebrated the millennium. It also brought in new rules surrounding “alter-ego” trusts. The main advantage to alter-ego trusts is the tax savings. Assets can be transferred to the trust at tax cost. Although the trust’s assets are deemed to have been disposed upon your death at fair market value, an alter-ego trust is held outside the estate and therefore, provincial probate taxes do not have to be paid.
There are three criteria that must be met for a trust to be considered alter-ego:
- The person transferring assets to the trust is 65 years or older.
- Any income earned by the trust is paid to that person while still alive.
- No one besides that person receives capital from the trust during their lifetime.
Since an alter-ego trust isn’t an actual will, something else to keep in mind is that any wishes you make may be more challenging for others to contest. There may also be a higher level of privacy.
Trusts for charitable donations
A common last wish for people in their will is to give to a charitable cause near and dear to them. Whether it’s to help the victims of recent weather disaster like the Fort McMurray fires or to give to an organization like a hospital, people want to leave a lasting legacy. A new trend with baby boomer is “living inheritance.” You gift someone their inheritance while you’re still alive to see them enjoy it. The same can be accomplished with charitable donations through trusts.
Let’s say you want to give to your favourite charity in your will. Normally, it counts as a charitable donation in the year you pass away and the prior year. Since the charitable donation tax credit is non-refundable, if your donation is sizable sometimes your executor may not be able to take full advantage of the tax credit. That’s when a trust comes in handy.
Using a “charitable remainder trust”, you can take advantage of the tax credit right away and also receive the income from the charity while you’re still alive. When you pass away, the capital cost is passed on to the charity.
Other uses for trusts
Here are some other common uses for trusts in estate planning:
- If you’re divorced and remarry, a trust can provide for your new spouse while you’re still alive and look after your kids from the first marriage when you pass away.
- If your spouse lacks financial knowledge, a testamentary trust lets a financially savvy trustee look after the funds to ensure the money lasts for the years to come.
- Similar to Paris Hilton, trusts can be used to look after children when they’re minors, up until they reach the age of majority, when the remainder of the capital can be paid out.
There you have it, several more uses of trusts as powerful estate planning tools. As mentioned last week, it’s best to speak with an estate planning expert about trusts to ensure trusts are set up correctly in the most tax effective manner.
Need some help with estate planning? We have a team of experts who can help you navigate the sometimes complex waters of estate planning. Feel free to contact our office today.
