Estate Planning: Two Trust Solutions
Published:
February 12, 2021
Author(s):
Estate planning is a customized process; the goal is to create a plan that’s best for a person’s unique situation. And while all estate plans share certain fundamental benefits and ingredients, there are special situations, such as owning a business, disabled beneficiaries, or blended families, that require more complex planning. But there are legal solutions to these special estate planning situations. One of the most useful: trusts. A “trust” is a legal tool that separates legal and beneficial ownership: a trustee holds assets for the benefit of one or more people, for a specific purpose (for example, for the benefit of your children, to be used for their education). Trusts can offer an estate planning solution for a wide variety of special estate planning situations, including:
- “Modern” Families. Families are no longer homogenous. The trust structure can be useful for families with complex dynamics, such as a blended family where a person wants to provide for both their current spouse during their lifetime and their children from a previous relationship after their current spouse’s death.
- Asset Protection. With proper planning, you might be able to protect trust assets from certain creditors or other unwanted influences.
- Tax Efficiency. Trusts can also assist to minimize or to defer tax, both during your lifetime and after your death.
Here’s how two kinds of trusts, testamentary trusts and inter vivos trusts, each offer a solution to special estate planning situations.
1. Testamentary Trusts
A testamentary trust is created in your Will and comes into effect only once you (the Testator) have died. Testamentary trusts can help you protect both your loved ones and your assets after your death.
Minors, Spendthrifts & Capacity Issues. It’s important to ensure that any inheritance you leave to minor children is left in a trust (often, a testamentary trust) so the assets are available for their benefit until they reach an age at which they can manage them on their own (often 25 or 30). A testamentary trust can also protect assets from beneficiaries who, though not minors, might need help managing money (spendthrifts), where beneficiaries are disabled or have capacity issues (often, a “Henson Trust”), or to protect the assets from an adult child’s relationship breakdown and creditors.
Blended Families. Spouses can create special testamentary trusts to benefit each other, allowing for deferral of capital gains tax for assets transferred into the trust until the surviving spouse’s death. This can be particularly useful in a second marriage or blended family situation, where it’s important to one spouse to maintain control over the ultimate disposition of assets after their own death. For example, you might leave your assets to your second spouse in trust, with the assets going to your children from your first marriage after your second spouse’s death.
Tax Benefits. In addition to important and valuable non-tax benefits, testamentary trusts can enable your beneficiaries to income-split with low or non-income-earning members of their own families, which can represent significant tax savings. For example, you leave assets to your adult child in a trust for their benefit and the benefit of their own children; your child can use income generated in the trust for their children’s benefit, which is then taxed in your grandchildrens’ hands – minimizing the tax payable on it. If you leave your adult child everything outright, without a testamentary trust, all the income the inheritance generates is added to your child’s income and taxed at their higher graduated rate.
2. Inter Vivos Trusts
An inter vivos trust is created during your lifetime. There are several forms of inter vivos, or “living”, trusts. Alter Ego and Joint Partner trusts are two of the most useful forms of inter vivos trusts to add flexibility to estate planning, and can help achieve personal planning objectives through any future incapacity and beyond. Only you (or your spouse or partner) are entitled to the trust assets and income they generate during your lifetime. On your death (or on the last to die in the case of a Joint Partner trust), the remaining capital is distributed to your chosen beneficiaries, which, with proper planning, could be coordinated with your Will. You can consider using an Alter Ego or Joint Partner trust as part of your estate plan if you satisfy certain conditions. While many benefits of testamentary trusts can generally be achieved using an Alter Ego or Joint Partner trust, there are a number of additional key benefits of using an Alter Ego or Joint Partner trust as part of an estate plan, including:
Tax Deferral. You can transfer the assets into the trust on a tax-deferred basis during your lifetime.
Probate Avoidance. Assets in an Alter Ego or Joint Partner trust won’t form part of the assets of your estate under your Will, so upon your death, the trustees won’t need to obtain probate to administer the trust assets or to transfer them to your beneficiaries. Avoiding probate avoids the associated probate taxes on the trust assets, its public nature, and the potential delays and costs of any court process.
Continuity of Asset Management. The trustees can continue to manage the trust assets in the event of your incapacity.
Please contact your McInnes Cooper lawyer or any member of our Estates & Trusts Law Team @ McInnes Cooper Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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