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Joel Attis

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Maybe you heard the story about the 60-year-old heiress who, thinking she was too young for estate planning, died and left everything to her husband, because she felt that her two twenty-something year-old children from her first marriage were too young to handle such a large amount of money.

Her second husband was 71, but wasn't quite ready for bachelorhood. Within a year he remarried a much younger woman, and then promptly died two months later. His new wife of two months inherited his first wife's fortune. The heiress' children got none of it.

Or perhaps you heard about the man who left his son $500,000, which the son used to buy a house with his wife. Two years later, they divorced, and she got the house in the settlement.

Then there's the one about a couple that inherited $250,000 from an uncle but received none of it because the CRA exercised its right to take the inheritance to satisfy outstanding taxes.

Obviously, these aren't the kinds of stories that you want people to tell about you or your family. To avoid the possibility of such trouble, you may need to establish a trust.

A trust is an agreement in which you (the 'settlor') transfer ownership of property to someone of your choosing (the 'trustee'), who then manages it for the benefit of your loved ones (the 'beneficiaries'). The trust can be funded during one's lifetime ('inter vivos trust') or at one's death if your will provides for it ('testamentary trust'). Typically, it costs between $1,000 and 2,000 to set up a trust, although you might spend more depending on the complexity of the trust.

Trusts have long been used by the wealthy to reduce and/or defer tax, but more and more middle-class people are finding trusts can benefit them as well. Appreciation in real estate values over the long term, stock market gains for astute investors, and the slow march of inflation have thrown many middle-class individuals into higher income tax brackets and left them facing the prospect of capital gains taxes at death that could decimate the value of bequests to their loved ones.

Under the Income Tax Act, when a taxpayer dies all capital properties (and certain other properties) are deemed to have been disposed of at their fair market value. Thus the taxpayer is taxed on the accrued capital gains. This capital gains tax on death can be avoided or reduced by implementing an "estate freeze." An inter vivos trust is a useful and flexible vehicle for an estate freeze. During the settlor's lifetime, the trust would acquire property of the settlor so that gains accrued on the portion of property within the trust would not be included in the settlor's income at death. The freeze is best used for property expected to increase in value over the settlor's lifetime, such as shares in a corporation, other securities, a cottage or other real property.

A charitable remainder trust can reduce taxes for a deceased taxpayer while doing good for one's community; and a life insurance trust can help guarantee the amount your heirs will receive in an orderly and structured fashion. A trust can also be used to direct how the assets one leaves behind will be managed, and to ensure that one's bequests end up in the hands of the intended heirs.

Trusts can provide for the maintenance and education of children. For example, the income of the trust payable to a child beneficiary could be applied to the child's university tuition. Although the child would be taxed on the income, presumably the child's tax rate would be lower than that of the parent, resulting in a savings of tax.

Trusts can be used to preserve estate property in cases where the intended beneficiaries are deemed incapable of responsible administration for reasons such as minor age, mental disability, infirmity, or lack of business experience.

Inter vivos trusts can reduce probate fees payable at death because the trust property does not form part of the deceased's estate.

Inter vivos and testamentary spousal trusts are effective where the settlor wishes to provide an income for the spouse during the spouse's lifetime, without transferring full ownership of the underlying property. Upon the spouse's death, the capital of the spousal trust could pass to the children (or any other beneficiaries named by the settlor).

Property can be transferred to a spousal trust on a tax-deferred 'rollover' basis. Thus, property of a deceased which passes to a testamentary spousal trust is not subject to capital gains tax upon disposition of the estate. A similar rollover is available for inter vivos spousal trusts, however, in the case of an inter vivos transfer, the income tax attribution rules may trigger a capital gains liability in the hands of the settlor.

Back to the oil heiress, who thought she was too young for estate planning and feared that her 25-year-old son and 27-year-old daughter would squander the money at their young ages, could have used a trust.

She might have set aside a percentage of assets in the trust for her children today, with the balance to be distributed to them when they attain a certain age.

Or she could have appointed a trusted friend or advisor as trustee to disburse the assets on whatever conditions she deemed appropriate -- or she could have left full discretion with her trustee as to how and when the balance of funds would be distributed to her children. A trust would have preserved her assets for her children.

A trust also would have left the divorcing son in a better bargaining position to keep his house. Had his father left the money in a trust, allowing a trustee to buy the house for the son, the wife wouldn't have been able to get her hands on it.

And the CRA could not have seized the assets in a trust established for the beneficiary with tax problems.

Life is full of surprises, but you can trust a trust.

Bottom line -- a trust can be very valuable financial and/or estate planning tool -- and should be considered in various financial and estate planning scenarios.

* Joel Attis is a Financial Advisor with AttisCorp Financial Group, Inc. in Moncton. Mutual funds provided by Partners In Planning. Comments or questions may be submitted to joel@attiscorp.com, or he may be reached at 855-1155.