Inter Vivos and Principal Residence Trusts – Hull on Estate and Succession Planning Podcast #83
Listen to Inter Vivos and Principal Residence Trusts
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about Inter Vivos and Principal Residence Trusts as effective tools to consider when tax planning a will.
Inter Vivos and Principal Residence Trusts – Hull on Estate and Succession Planning Podcast #83
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #83 of our podcast on Tuesday, October 23rd, 2007.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by
Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian. How are you today?
Ian Hull: I’m fantastic. Just coming off…I had a late night last night on a mediation and I tell you, it was a great experience as often they are. I was advocating instead of mediating, which you and I do together most of our mediation time. But we were…it was interesting. It was in front of a sitting judge who chose to case conference. It took a whole day but it was a great reminder to me as we turn to our topics today about tax planning Wills and looking at the sort of core planning issues. It was a great reminder to me that as much as you want to try to plan and organize your estate, the human dynamic is a big, big part of life after death, so to speak, for your beneficiaries. I learned a couple of really important lessons again and they were lessons that I’d heard before and experienced before, but they were great lessons. One was that because it was a sitting judge, we were able to get the perspective of a sitting judge in terms of how this might unfold. And you and I, of course, mediate a lot of cases with retired judges. I haven’t done a lot with sitting judges for awhile and it was fascinating to get that perspective, so that was number 1 that I learned a lot from. And then secondly was what really surprised me really at the end of the day was the whole dynamic of a mediation generally. But anyway, it was a good experience.
Suzana Popovic-Montag: I think those situations, especially when you have a sitting judge, resonates so much Ian, with both counsel and the clients. It just seems that it adds a whole layer that, using a retired judge for instance, or some other person who isn’t…doesn’t have that kind of credibility associated with it. It’s a very different kind of situation.
Ian Hull: It really is and, you know, it’s a good reminder that, as I say, we sit down, we want to plan our estates, we want to keep our eye on the ball on the tax issues and the planning issues that we were sort of keeping focused on in our mini-series we’re doing now. But I was really surprised at how the non-legal parts of it played out in this particular mediation, not different much than most mediations, but still surprised nonetheless that, you know, the non-legal issues really prevailed, the emotional issues between, this was a fight between two brothers over an estate. But one of the things that struck me about the middle of the mediation was that we started to talk about a solution. And one of the solutions was to create a new trust. And in this case that I was mediating there was a situation where a testamentary trust was established. But there was talk about trying to resolve it by creating a new trust, an inter vivos trust. And I sort of took a deep breath and thought about it and as we were working through some of the scenarios and so on, I thought, you know, gee, it’s a good thing that, from our perspective, we, you know, have done a lot of the leg work on these inter vivos trusts and looking at how they can be an effective tool because when you’re under the hot lights of a mediation, you don’t have time to learn the product, so to speak. So we turned to it pretty quickly. And one of the first things we talked about was that inter vivos trusts can, of course, be an effective tool in avoiding the estate administration tax that is payable on death if the assets side in the estate itself.
Suzana Popovic-Montag: Another thing that I would think, you know, when you deal with these kinds of inter vivos trust arrangements, you want to…I certainly try to remember the fact that, you know, as soon as you start transferring assets into a trust, that’s going to effectively lead to a deemed realization of the property that’s transferred into it at fair market value. And that’s something that I just try to keep in mind because, you know, it’s easy to say I’m going to set up a trust but there still are tax consequences associated with that.
Ian Hull: For sure, and just another sort of lesson that we came out of at the last mediation that I was involved with was, that was the first question that I asked as we were starting to consider this, is that in that case, the estate had fallen in. The person had died and we were thinking about establishing with some of the money that was in this estate, this inter vivos trust. And the first question I asked was, have the deemed disposition taxes been paid on the estate? And fortunately in that case, they had. But it is a very important starting point that you realize that whenever you create these trusts, the tax is payable on the transfer.
One of the twists that we can’t forget with our clients, which I try to make sure I tell my clients to consider in the inter vivos trust environment, is to create a principal residence trust. And that is a trust really that helps us deal with an isolated asset being the home. And in Canada, we are blessed with no tax payable on principal residence but if you want to put your principal residence in a trust, you can do it, if properly drafted, into a principal residence trust and the taxing authorities, Canada Revenue Agency, won’t treat it as a special asset and they’ll treat it as a principal residence in terms of the tax payable on it when you both put it in and take it out. And that’s a very important option. And it’s an estate planning option that I like to run by my clients because sometimes, for example, you have a younger child who…maybe not younger but maybe they’re in their twenties and you don’t want to pass on the asset directly or give someone the asset directly without letting them enjoy the benefit of a non-taxable growth in the principal residence. But at the other end of the day, you also may want to add some protections to that home and where it goes and how it gets out of. And one example I think of is that in another matter that I was involved with, what we did was we created in an inter vivos trust, the principal residence trust, we created a pool of money to be put into the principal residence trust and the trust provision said that the money in this trust may, not has to, may be used to buy a principal residence. And what they did in that case was they used…they put $1,000,000 in that trust and they used $700,000 of it to buy the principal residence and they kept the rest to help with the expenses. So this podcast isn’t about how to draft principal residence trusts but it is a planning tool in the inter vivos world, inter vivos trust world that can be very effective.
Suzana Popovic-Montag: That also brings to mind the possibility of other kinds of trusts in addition to that. Like, I know you’ve talked a lot about in the past joint partner trusts and alter ego trust arrangements as well.
Ian Hull: Yeah, and they are a really important tool. In Canada, they certainly changed the landscape fairly dramatically and I think both the alter ego trusts and the joint partner trusts justify a special podcast in a sense. We have talked about them in the past but I’m going to make a note that we want to come back to that issue because it’s an important planning issue, but one that, for the purposes of this…today’s podcast, I think we need to sort of more or less gloss over in the sense that we don’t want to get too…we want to try to cover the general concept of an inter vivos trust. But the alter ego trusts and the joint partner trusts are again inter vivos trust planning that are set up to essentially allow you to transfer assets into a trust and not get stung with the deemed disposition. And we go back to first principles. As we said, the inter vivos trust is a deemed disposition the minute you put an asset into the trust. So if you have an asset that has been growing that you haven’t paid the tax on the capital gains yet and you decide to put that asset into a trust, that instant there’s deemed disposition tax payable. Now, with an alter ego trust or a joint partner trust properly drafted, you can avoid that deemed disposition because of the special rules around it. And one of the core special rules, without getting in too much detail, one of the core special rules for these two special trusts are that to enjoy the lack of being taxed, so to speak is, is that you have to be age 65 or over. So they are only established for a very, you know, specific market, so to speak.
Okay, those two, as I say, I’ve made a note because I think there’s really a lot there to consider, but we’re going to come back to those trusts from a planning standpoint. And in fact, you know, I’m going to make another note and say that we could probably have some more discussion on the principal residence trusts as well. But let’s leave that for another day because that covers our sort of general comments on inter vivos trusts.
Just then to turn to one topic that we’re not going to have time today to cover entirely but the question of RRSPs is such a…it’s sort of the…it used to be the biggest planning issue that most Canadians deal with. I mean, most Canadians who have pass on wealth, aren’t passing on massive amounts of wealth, they are passing on savings. And one of the core savings that often lands in an estate is the RRSP. And we’ll talk a little bit about what the general concept is, but we also know from a planning standpoint that that has to be one of the core areas to consider when we are sort of revisiting our Will plan from a tax perspective. We used to…I mean, until the joint accounts issues flared up over the past 5 years, that now seems to be one of the core planning issues. But until that happened, the RRSP was the dominant issue for most regular Canadians like you and I in terms of our savings, because that typically is the only pot that’s there.
Suzana Popovic-Montag: And now recently with the RESPs, the Registered Education Savings Plans, those are things that are also coming into the mix, as well as, and we’ve talked about in previous podcasts, life insurance proceeds. All of those are other creative ways to sort of deal with the tax consequences of an estate plan.
Ian Hull: So just…I’m just going to introduce the concept and then we’re going to work through it in some detail because of the importance of it in future…in the next podcasts. But the concept again comes back to the whole idea that, you know, this whole idea that there’s a deemed disposition of the capital growth unless, and we talked about the inter vivos pure trust, it has to be…you have to pay the tax when you create the trust. We talked about the idea that you can maybe avoid it with a principal residence trust. You can probably avoid it…well certainly avoid it with the alter ego trust and the joint partner trust. Well the same goes with deferring tax on RRSPs. With RRSPs and RRIFs, what we’ve done from a planning standpoint and what we’re going to talk about in our next podcast is, is that what special treatments can we deal with with these investments to try to at least work around the impending doom…not death…the impending doom of a deemed disposition. So I look forward to that topic and I appreciate your comments today too, Suzana.
Suzana Popovic-Montag: Thanks very much Ian. Speak to you soon.
Ian Hull: Thanks a lot.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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