Tag: testamentary trusts
Over the past few blogs, we discussed alternates for having Clients sign Wills when we can’t meet with them in person.
One of the options was to have client sign holograph Wills. While that may work with more straightforward instructions, it won’t be practical where testamentary trusts are necessary.
In today’s blog, we will focus on an alternate option – “incorporation by reference” of an unsigned “Will” into a holograph Will.
The terms of one document (“the Incorporated Document”) can be included in another document without repeating all of it provisions. This is known as “incorporation by reference”. In order to incorporate the terms of the Incorporated Document into a Will, there are four well established requirements:
- The Incorporated Document must be referred to in the Will;
- The reference in the Will to the Incorporated Document must be sufficient to identify the Incorporated Document; and
- The Incorporated Document must be in existence at the time the Will is signed. It cannot come into existence at a future date.
- The Incorporated Document must be “entirely separate and apart” from the Will.
The most common examples of incorporation by reference in a Will are a binding memorandum regarding the disposition of Personal Effects and a trust company’s compensation agreement.
Rather than just a list of personal effects or compensation agreement, can the Client incorporate an entire unsigned Will by reference?
Where a testator in a duly executed will or codicil refers to an unattested written paper (whether of a testamentary form or character or not), as a written paper then in existence in such terms that it may be ascertained, the paper so referred to becomes part of his will, in other words, is incorporated therein; provided always that the paper referred to is actually in existence at the time of the execution of the will or codicil. Probate Practice and Re Warren (1930), 38 O.W.N. 358 (Ont. H.C.),
This concept was not disputed in Re Coate Estate, (1987) 26 E.T.R. 161, although the facts in that case did not lead to a finding of incorporation by reference.
Similarly, in Re Dixon-Marsden Estate (1985), 21 E.T.R. 216 (Ont. Surr. Ct.), the Court found that the particular handwriting did not qualify as a holograph document. Nevertheless, Judge Misener seemed to endorse the use of a holograph document incorporating the terms of a formal, but unexecuted Will. In that case, a typed Will on a single piece of paper was not properly signed with two witnesses. However, at the bottom of the page the testator wrote, in his own hand, “The above-mentioned are in short those to whom my estate is left” and below that he signed his name.
“I have always understood that the doctrine of incorporation by reference contemplates the existence of a testamentary document that qualifies for probate, independent of the document sought to be incorporated. If that is so, the condition precedent to the argument that a typewritten document is incorporated is the tendering of a document wholly in the handwriting of the testator and bearing his signature that can be admitted to probate all by itself. Therefore, on the facts of this case, the handwritten words ‘the above-mentioned are in short those to whom my estate is left’ must be capable of admission to probate.”
In that case, the handwritten portion could not be separated from the typed portion and so did not satisfy the requirement that the two documents be “entirely separate”.
In Re Chamberlain Estate, the deceased enclosed two documents in an envelope:
- A printed Will form, which the deceased signed but was not witnessed.
- A single sheet of paper wholly in the handwriting of the deceased which listed several of the deceased’s assets. The deceased wrote his name at the bottom of the sheet.
The issue before the court was whether the documents could be read together as a valid Will.
Justice Maher emphasized that although documents referred to in a testator’s Will or codicil may not be duly executed in accordance with The Wills Act, they may nonetheless be incorporated in the Will.
Justice Maher found that the document written wholly in the handwriting of the testator was a valid holograph Will and it met the conditions outlined above. Although the documents were not completed at the same time, the incorporation by reference doctrine still applied as they were testamentary in nature and wholly in the handwriting of the deceased.
The second document being testamentary in character and wholly in the handwriting of the deceased is a valid holograph will and it has been held that the doctrine of incorporation by reference applies to holograph wills: Re Long Estate,  1 All E.R. 435.
Based on these authorities, it appears that a holograph Will could incorporate the terms of a non-executed formal Will as long as the 4 conditions were properly met.
However, there is an outlier Ontario case that is problematic- Facey v. Smith (1997), 17 E.T.R. (2d) 72 (Ont. Gen. Div.).
In Facey, the court was faced with an unseemly fact scenario. The deceased was murdered by her husband who later, on the same day, committed suicide. The issue was whether certain writings made by the deceased were holograph Wills and if so, did thy properly incorporate the terms of a formal Will by reference.
The court found that a holograph documents did not qualify as a Will because it did “not show a fixed final intention as to disposition on death”. However, in obiter, the Court said the following:
“I have no difficulty with the doctrine of incorporation by reference applying when the Will into which type written words are to be incorporated is itself a witnessed Will. When those type written words are declared incorporated, the statutory requirement of the testator’s signature duly witnessed is wholly satisfied. In the case of a holograph Will, however, incorporation of typewritten words does not meet the statutory requirement. That requirement is that the holograph Will, to be valid, must be “wholly by his own handwriting and signature” and patently the incorporated typewritten words are not in the testator’s handwriting. The doctrine of incorporation by reference was developed to relieve against the harshness of the Wills Act and to give effect to the intentions of a testator. I am not satisfied that the law in Ontario is or should be that typewritten documents can be incorporated into a holograph Will. The purpose of requiring certain formalities in the making of Wills is to prevent fraud and no fraud is here alleged. Although not formally required, my answer to question two is “no”.
If you decide to recommend this strategy, here are a few suggestions:
- Have the formal Will identified as “Schedule A”;
- Ensure that the Holograph document qualifies as a valid Will, both in terms of execution and in terms of testamentary intent.
- Have the Client initial each page of “Schedule A” and sign it.
- Properly incorporate by reference Schedule A in the Holograph Will.
Here is a link to a sample Client Instruction Sheet for your consideration. Use with caution!
Hoping you are safe and healthy,
Remember the good old days? Vacations without smartphones, real letters in your mailbox, tax-effective testamentary trusts? Ah yes, those testamentary trusts.
Before 2016, income and realized capital gains within most testamentary trusts were taxed favourably in the trust, at graduated personal tax rates, not the top tax rates associated with inter vivos trusts. It was an estate planning tool that let many trust beneficiaries, typically spouses or other family members of the deceased, lower their overall taxes through income splitting, with trust earnings taxed in the trust and the beneficiary’s other income taxed personally.
Today, testamentary trusts are taxed at the highest marginal rate, with only two exceptions:
- Graduated Rate Estates – which are trusts arising as a consequence of the death of a testator, rather than because a trust was expressly provided for by the terms of a will. These are still taxable at marginal rates for the first 36 months after the testator’s death; and
- A Qualified Disability Trust, which is a testamentary trust with a beneficiary who qualifies for the disability tax credit. These trusts are still taxable at marginal rates.
With the graduated tax rate advantage now eliminated, those planning their estates are weighing alternatives, specifically alter ego and joint partner trusts that are available to those age 65 and older. Advisor.ca has a good discussion of these alternatives in light of the new tax treatment of testamentary trusts: http://www.advisor.ca/tax/estate-planning/alternatives-to-testamentary-trusts-158703.
But it’s also important to remember that testamentary trusts can still play an important role in estate planning, even without the benefit of graduated tax rates. Testamentary trusts can still be beneficial from a tax standpoint if beneficiaries have low levels of income, they still offer protection from creditors, and they’re still a very effective tool in second marriage situations, providing income to a second spouse for their lifetime and capital to children from a first marriage thereafter.
This Globe and Mail article provides a good overview of the many potential uses of testamentary trusts today: https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/consider-these-testamentary-trusts-in-your-will/article27031380/.
While the good old days for testamentary trusts may be over, there’s still life left in this estate planning structure in a number of situations.
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Earlier this week I blogged about planning considerations for establishing a testamentary trust that may qualify as a graduated rate estate. To continue on the topic of planning consideration in light of the recent changes to the Income Tax Act, I thought it would be fitting to highlight some considerations regarding the newly introduced Qualified Disability Trust (the “QDT”).
One planning technique that is commonly used when disabled beneficiaries are involved is a Henson Trust. It is important that testators understand that the creation of a Henson Trust does not automatically qualify as a QDT since the disabled beneficiary must be a recipient of the Disability Tax Credit. Accordingly, it would be prudent to highlight that it is possible that the income earned from the Henson Trust may be subject to top-rate taxation.
It is also quite common for a testator to identify the beneficiaries of a testamentary trust as a class of beneficiaries such as children or issue. However, given that testamentary trusts are now taxed at the highest rates, a testator may wish to specifically name the beneficiaries of the Trust in the event that the named beneficiary becomes disabled during the length of the testamentary trust. In doing so, the testator will have satisfied one of the requirements for the Trust to be designated as a QDT.
The limit of one QDT election per beneficiary also raises some estate planning challenges. It may be necessary to explore planning solutions in situations where the named beneficiary of an insurance trust and a testamentary trust is disabled. In this case, the testator may want to consider whether both trusts are necessary.
It is extremely important that clients understand the estate planning challenges that arise when attempting to take advantage of the graduated rate of taxation, and should discuss any estate planning options with a tax professional before a final decision is made.
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Our blog has previously discussed Graduated Rate Estates (“GRE”) and changes to the Income Tax Act, which now limit the benefit of graduated rates of taxation for up to 36 months from the date of death if the estate qualifies as a testamentary trust, and is designated as a GRE in its first taxation year.
Changes to the tax benefits of testamentary trusts raise a number of planning considerations that should be considered when making an estate plan. First, when drafting a testamentary trust, a key consideration should be whether it would be beneficial to the estate and its beneficiaries to delay the distribution of the estate for up to three years to potentially maximize the progressive taxation rates of all income in the trust.
If a testamentary trust is established with a view to take advantage of the new tax regime, then another important consideration is the extent of discretion that a testator wishes to grant to his or her Estate Trustee. Since an estate must maintain its status as a GRE, a testator may wish to clearly direct his or her Estate Trustee to take steps necessary to use or manage the estate assets in a manner that is consistent with the GRE requirements set out in section 248(1) of the Income Tax Act. Alternatively, the testator may wish to authorize his or her Estate Trustee to determine whether it is necessary or beneficial to preserve the estate’s status as a GRE in light of circumstances that may arise post-mortem.
All estate planning considerations that are intended to take advantage of changes to the Income Tax Act should be discussed with a tax professional throughout the estate planning process.
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Secret and half-secret trusts are trust arrangements made between a testator and a trustee, without disclosure of the terms of the arrangement, but where an understanding exists between the parties. Secret trusts are not mentioned at all in a testator’s will. Half-secret trusts are explicitly included in a will, but the terms of the trust are not disclosed.
There are certain requirements that must be met in order to form a secret or a half-secret trust. With respect to secret trusts, there are four required elements, as per Ottaway v Norman  3 All ER 1325 at 1332 (“Ottaway v Norman”):
- An intent by the testator to subject the trustee to an obligation in favour of a beneficiary;
- Communication of that intent to the trustee;
- Acceptance of the obligation by the trustee, either expressly or implicitly; and
- The conditions are satisfied before or after execution of the will, but before the testator dies.
With respect to half-secret trusts, the timing of the communication and acceptance is different: it must occur before or at the time of execution of the will.
Due to the nature of these types of trusts, there can be issues proving their existence. Section 13 of the Ontario Evidence Act, RSO 190, C.E-23, requires corroboration.
Accordingly, as in Re Dhaliwal Estate, 2011 ABQB 279 (“Re Dhaliwal”), where the only evidence of the existence of the alleged secret trust were the affidavits of the chief beneficiaries of the trust, the required corroboration was not provided.
According to Re Snowden  CH 528, the standard of proof for proving a secret or half-secret trust is the normal civil standard (i.e. balance of probabilities).
As per Ottaway v Norman, where a secret trust fails, the trustee will be entitled to the trust property absolutely with no obligation to the beneficiary. By contrast, if a half-secret trust were to fail, there would be an automatic resulting trust in favour of the testator’s estate. The distinction is due to the fact that, in the case of a half-secret trust, the will explicitly states that the trustee has no beneficial interest in the trust property.
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The amendments to the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (the “I.T.A.”) have eliminated graduated rate taxation for testamentary trusts, which were previously taxed at rates applicable to individuals. Starting next year, testamentary trusts will be taxed at the highest marginal rate of taxation, subject to a couple of exceptions, one of which applies to a testamentary trust that can be considered a Graduated Rate Estate (GRE). The purpose of these amendments is to try to eliminate unequal treatment of testamentary trusts as compared to inter vivos trusts, which are taxed at the highest marginal tax rate, while testamentary trusts have enjoyed graduated rates for decades.
Starting December 31, 2015, the I.T.A. s. 248(1) will contain a definition for a GRE. In order to qualify as a GRE and benefit from graduated rates of taxation, no more than 36 months can have passed after the death of the testator whose estate established the trust, it must designate itself as a GRE, and only one GRE can be designated per individual. Going forward, as noted in this article from a national law firm, only GREs may benefit from graduated tax rates, use certain loss carry-back provisions, and have a non-calendar year end.
Another exception to the elimination of graduated rates of taxation applies to a qualified disability trust. The I.T.A. s. 122(3) states that in order to be a qualified disability trust, it must: (i) be a testamentary trust; (ii) the beneficiaries of the trust must have made a joint election with the trust for the trust to be a qualified disability trust, and (iii) s. 118.3(1)(a) to (b) must apply to such beneficiaries.
There have also been changes to treatment of charitable donations made in a Will. Whereas, in the past, a charitable gift was considered to be made immediately preceding the death of the testator, the new rules provide that the gift is made at the time it is actually transferred to the donee. The value of the property will also be determined on this basis. The amount of the charitable donation can then be allocated between the deceased or the GRE, as per I.T.A. s. 118.1(1), as long as the Estate can be considered a GRE at the time. The amount of the gift can be deducted by the deceased in the year the donation was made or used in the preceding taxation year. Alternatively, the gift can be deducted by the GRE in the year of the donation, carried forward, or carried back for up to the 36 months that a GRE may exist as such.
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Traditionally, inter vivos trusts (those created by an individual during their lifetime) have paid tax at the highest individual income tax rates, whereas testamentary trusts (which are created by a will) have enjoyed taxation at marginal rates. The income earned with respect to testamentary trusts has traditionally been taxed on a separate tax return, and as such, many have used testamentary trust as a means to income split, significantly minimizing their overall taxes payable.
The Federal Government in its 2014 Budget was the first to propose changes to the taxation of testamentary trusts. Specifically, the 2014 Budget announced the elimination of the favourable tax treatment enjoyed by testamentary trusts, such that all trust income would be taxed at the highest marginal rates, and in a similar manner to the taxation of inter vivos trusts.
Draft Federal legislation was subsequently proposed in August, 2014 and was formally enacted in December, 2014, such that the changes would be effective at the Federal level as of January, 2016.
The 2015 Ontario Budget now proposes the implementation of these Federal legislative changes to the taxation of testamentary trusts at the Provincial level.
The changes would mean that testamentary trusts will be taxed at the highest marginal rate with only two exceptions:
a) Graduated Rate Estates (trusts arising as a consequence of the death of a testator rather than because expressly provided for by the terms of a will) would still be taxable at marginal rates, for the first 36 months after the testator’s death; and
b) A Qualified Disability Trust, i.e. a testamentary trust with a beneficiary who qualifies for the disability tax credit, would still be eligible for marginal rates.
In addition, the 2015 Ontario Budget proposes that Ontario tax credit for charitable donations over $200 would be raised to 17.41% for trusts that pay the top marginal personal tax rate.
The government will introduce legislative amendments to implement these measures which, if passed, will take effect January, 2016.
Thank you for reading.