Trusts for Retirees – Probate Planning

When estate planning, most retirees wish to review strategies to avoid probate fees, which in Ontario are 1.5% of the value of the asset that is distributed via a will. 

A potential client asked, “Can trusts be used to avoid probate costs when we transfer assets to the next generation?”

The answer is yes.

For retirees, there are two specific trusts that can be used to avoid probate costs, and since you are alive when you make them they are called “inter vivos trusts.” 

The two specific types of trusts are:

• Joint Partner Trusts – both spouses/CLP’s must be age 65
• Alter Ego Trust – for individuals over the age of 65

For these types of trusts, you would normally transfer non-registered investments and assets into them. As the settlor (person who sets up the trust) you are entitled to receive all the income of the trust during your lifetime and/or your spouse/CLP’s.

You do not pay any tax on the transfer of assets, and upon death, the assets would go to the beneficiaries without probate. In Ontario, the probate fee savings would be 1.5%.

Some of the advantages can include:  

• Assets can be transferred into the trust on a tax deferred basis. 
• Probate savings on death.
• Assets are not part of the estate, so they pass more quickly to the beneficiaries.
• It is confidential since it is not a public document like a will.

Some of the disadvantages can include: 

• You will have to pay legal fees for the set up of the trust.
• There are ongoing maintenance costs such as tax returns.
• There is a limitation of the capital gain exemption for CCPC shares, farm, or fishing properties.

Your entire estate plan should be reviewed when determining if a joint partner or alter ego trust is appropriate and will accomplish what you desire. There may be some probate savings, but you must balance that off with:

• the costs to set up and operate, 
• current tax issues, 
• and your desired result. 

Your accountant, lawyer, and CFP® professional should be able to assist you with this review and strategy. 

Excerpt from Preserving Wealth:

“There’s no way to put this without using the legal terms,” explained Uncle Wayne, “so here goes. A trust is an obligation that binds a person (the trustee) to deal with the property he controls (the trust property) for the benefit of another (the beneficiary) in accordance with the terms indicat­ed by the person who established the trust (the settlor). What makes this confusing sometimes, is that the settlor and the trustee can be one and the same. Here, I wrote it down for you,” he said, handing each of us a piece of paper.

Trust – entity to which property is transferred

Settlor – individual who transfers the property to the trust

Trustee – person who makes the decision for the trust

Beneficiary – person who will benefit from the property

“I hope you’re still with me,” Uncle Wayne added, “because there’s more. A trust can either be an ‘inter vivos’ trust or a testamentary trust. An inter vivos trust is a transfer made while you are alive, and it can be either revocable, which means you can change it, or irrevocable, which means you can’t.

“The taxation of trusts can also be confusing, but you should remember that the income earned by a living trust is taxed at the highest marginal tax rates, with no deductions. However, if the income earned is paid out to the beneficiaries, it’s then taxed as the beneficiaries’ income, which allows for income splitting, assuming the benefi­ciary has a lower tax bracket than the person who gave the property.

“With my own estate planning since I am an old fogey, we’re reviewing a specific type of inter vivos trust called a joint partner trust. These types of trusts allow a settlor (me and my beautiful wife) to transfer capital assets to a trust on a tax-deferred basis, provided we are both over the age of sixty-five at the time of the transfer. The conditions are that we as settlors must receive the income from the trust and pay tax on it each year. The capital gains tax is deferred until our deaths. Now there are some set-up fees and tax returns to file, so we’re weighing the pros and cons of perhaps putting the family cottage and some of our investment portfolios into a joint partner trust for our kids. Aunt Lorraine is looking at a similar type of trust for Mark for the cottage as we discussed early, but since she’s single, it’s called an alter ego trust.

“The other kind of trust, a testamentary trust, is something you set up under the terms of your will. That means the assets will have to go through pro­bate, and the estate will have to pay fees, but at least you maintain some control over how the assets are handled after you’re dead.

“If it sounds complicated, believe me, it is. What’s important, though, is that you understand the concept of the trust, how it’s taxed, and who pays what. That’s what your lawyer or accountant is for.

For more information, you may want to review; Why Probate may be a Good Thing

Have Questions?

If anything above isn’t clear—or if you’d like to talk through any of it—let’s set up a quick call or virtual meeting. 

Book time with us HERE

Looking forward to helping you stay on track. Best Regards, Jack Lumden, MBA, CFP® Financial Advisor, CI Assante Financial Management Ltd.

Jack Lumsden, MBA, CFP®, is a financial advisor at CI Assante Wealth Management Ltd. with over twenty-five years of experience. He focuses on helping those transitioning from their working years to retirement, creating lifelong income and cash-flow strategies from accumulated financial assets.

A Burlington resident, Jack enjoys staying active and coaching high school football. He values family time – attending sports events with his son, Connor, and country music concerts with his daughter, Paige. He and his wife Sandi, also love to travel. Jack holds a BBA from Wilfrid Laurier University and an MBA from McMaster University, and he is a CERTIFIED FINANCIAL PLANNER® professional.