Planning Opportunities with Spousal Trusts

Knowledge Bureau’s May CE Summit featured a review of the appropriate time to consider trusts in planning and in particular, spousal trusts.  The instructor presentation, led so expertly and enthusiastically by Carol Willes, MBA, LLM, TEP, underscored some important issues, discussed below in an excerpt from the Advanced Retirement and Estate Planning course, now available with the instructor-led presentations, for students who wish to study online. 

A spousal trust is a specialized form of trust under the Income Tax Act (Canada) that allows capital property to be placed in trust for a spouse or common-law partner without triggering any capital gains when the trust property is transferred into the trust and then to be held in the trust, free from the application of the twenty-one year deemed disposition rule that generally applies to trusts. The following suggests some of the estate planning opportunities to be considered with spousal trusts:

Each Spouse in Top Tax Bracket and Staying There

If your clients are legally married, or in a common-law relationship, and wish to continue income splitting after the death of the first, a spousal trust might be an estate planning strategy.  This normally presents where one or both of the spouses are high-income earners, and expect to stay that way, exhausting the bottom tax brackets.  They also need to own assets to fund the spousal trust.  This excludes registered investments subject to possible amendments, discussed below, and excludes non-income producing assets like principal residences and vacation property.  Assets that remain in joint names are also excluded as they will automatically pass to the survivor and will not be part of the assets available within the estate to fund the spousal trust.

Second Marriage Situations

If spouses are looking at a mechanism to ensure that at least some portion of the wealth is paid to the children from a first relationship, then a spousal trust can be useful.

Sometimes a spouse will simply provide that their wealth is to be divided immediately on their death between the children from a first relationship and their new spouse. In other instances, they are hesitant to divert the capital to the children right away.  They think the new spouse might need income from the capital to sustain their lifestyle, or that the new spouse may need emergency access to all of the available capital if, for example, they require medical assistance and have to travel to the Mayo Clinic for treatment. 

Under those circumstances, a spousal trust might be established to receive some or all of the assets at the death of the first spouse.  While the surviving spouse is alive, they will be entitled to all of the income.  Provisions can be inserted to allow the surviving spouse access to the capital if emergencies arise.  On the death of the remaining spouse, the capital then goes to the children.  Care has to be taken to ensure that the arrangement does not offend the applicable marital property legislation.  An agreement or release can be executed by the spouses when the estate plan is drafted, ensuring that marital property claims are released or waived and do not become a problem in the later working of the plan.  On this point there are more details set out in the course in “Additional Technical Content.”

In addition to second marriage situations, there may be other circumstances where clients want to ensure or guarantee that some portion of their capital finds its way to a destination of their choosing but only after allowing their spouse to have access to the income or to emergency capital.  This could, for example, be a favorite charity.

Spouse Prone to Errors in Judgment - Alternately, they might worry that the surviving spouse will exercise errors in judgment and wish to ensure that there is at least an emergency fund available to take care of the spouse’s needs if they squander the balance of their assets.

Bottom Line:  speak to a qualified and experienced lawyer, in consultation with the accounting and financial specialists working on the client’s Real Wealth Management™ plan, to ensure the right planning results are discussed.  

Additional educational resources: In addition to these estate planning considerations, use of spousal trusts has a number of advantages and disadvantages that must be considered. Learn more by taking the Introduction to Trusts course.