Trusts are often looked to in estate and wealth planning because of the potential tax advantages they can afford. Some of these tax advantages, including probate tax and income-splitting opportunities, have been examined in a previous blog post “Sometimes it is About the Tax – Inter-vivos Trusts and Spousal Loans.” As trust assets are not subject to probate upon death of the settlor, they are not subject to probate tax – referred to as Estate Administration Tax in Ontario – which, based on Ontario’s current rate of approximately 1.5%, can result in substantial tax.
The advantages of trusts, however, are not limited solely to relieving tax headaches – trusts can also help with more personal headaches, such as problematic beneficiaries!
While in a perfect world everyone might aspire to treat their loved ones equally, unfortunately not every beneficiary is created equal. Although you may have the freedom to exclude your loved one in your will, you may feel a sense of moral obligation to keep them in to mitigate potential hurt feelings and animosity, especially considering the public nature of a will.
An often overlooked benefit of using an inter vivos trust (i.e. a trust set up while you are living) is the privacy it affords. A will, unlike a trust, becomes part of the public record once submitted to the court upon death, where it is part of the court file and is available to anyone who may wish to request a copy to review its contents. A trust is not subject to public scrutiny making its private nature attractive, in particular for those with complicated family dynamics.
With a trust, hurt feelings can be better managed and avoided. If you wish to benefit certain beneficiaries more than others, they can be included as beneficiaries of a trust set up during your lifetime. This saves you from having to make the uncomfortable decision of leaving a loved one less than others, or potentially out of your will altogether.
Aside from the privacy a trust allows with respect to beneficiaries, you may also want privacy with respect to your assets. When a will is submitted for probate, the court requires disclosure of the value of your estate, which also becomes part of the public record. Such disclosure is not required for a trust.
In addition to “snooping” beneficiaries and others, a trust may protect your assets from litigation after your death. An angry beneficiary who is unhappy with what they receive may try to challenge the validity of your will after your death based on lack of testamentary capacity or undue influence, and hold up the administration of your estate. Evidence supporting these arguments is more difficult to prove when a trust has been in place for many years prior to the death of the settlor.
A trust may also protect beneficiaries from themselves. A discretionary trust gives the power to the trustees to decide if and when to make a payment to a beneficiary, and for how much. If a beneficiary has spendthrift tendencies and overspends or is not good at managing money, the trustees can stagger payments to the beneficiary or exclude them from a distribution altogether if there is fear that the beneficiary will exhaust all the assets they receive at once.
For those beneficiaries with creditors, a trust can protect their inheritance by including a clause in the trust instrument that prevents a beneficiary from transferring their interest in the trust to a creditor or prevent a distribution to a beneficiary with creditors altogether. This can extend to potential matrimonial claims of a beneficiary. A trust may be the best way to protect your assets by ensuring they are distributed for the benefit of your loved ones, rather than an outside party owing to questionable spending habits or potential matrimonial issues of your loved ones.
Tax planning always plays a critical role in your overall estate and wealth plan, but in trying to determine the most optimal tax plan, certain tools are often overlooked or undervalued that can offer you distinct advantages. Taking the time to look into these strategies may optimize your planning and ultimately provide you with peace of mind.
It is important to not let the proverbial tax tail wag the dog. While the tax advantages – and, sometimes, disadvantages – are an important consideration in determining whether a trust makes sense for you, there are a variety of important other factors that make a trust attractive and beneficial, and that will help you achieve your overall wishes for your estate plan based on your individual circumstances.
— Stephanie Battista