- Get the information you need on trusts when planning your estate - February 26, 2020
By Kenneth C. Pope • When planning your estate it only makes sense to understand the difference between inter vivos and testamentary trusts.
An inter vivos trust (IVT) is often referred to as a living trust because it created living people rather than on a death and can be distributed either before or after a beneficiary’s death.
A testamentary trust comes into effect when a testator dies. Property must then pass into the trust by way of the will, which may require a probate application. Both trusts are the subject of my video that can be found here.
At Kenneth C. Pope Law, we specialize in helping families with children with special needs plan ahead in order to protect their assets and ensure that provisions for the child are made which don’t disqualify them from provincial disability benefits.
Understanding the vocabulary
I prepare a client’s will with a testamentary trust first in case they die unexpectedly and also so that the person has an understanding of the vocabulary used and choices involved.
We then discuss the advantages and disadvantages of an inter vivos trust. Inter vivos is established while the parties – the settlor (the person who establishes the trust), the trustee (those who administer the trust) and the beneficiary (the person receiving the claim) – are all alive.
These trusts are most often used to hold a home for a beneficiary with special needs or to hold and invest excess funds that are generating income taxed at the top marginal when controlled by the settlor. The income is declared by the beneficiary who, commonly, would have $20,000 of unused personal tax credits available to offset the tax liability.
The fund may be either settled irrevocably on the trust or lent to the trust with a note back and the annual payment of the prescribed rate of interest, which is approximately one per cent.
No tax payable
The remainder of the income is kept for the beneficiary. In the most common scenario, this income is used by the beneficiary and no tax is payable on the first $20,000.
For example, the person establishing the trust could either settle $1 million on the trust, in which event they never get it back, or they can lend it to the trust with the understanding that they receive the prescribed rate of interest each year.
The loan can then be called in when the settlor dies and would fall back into their estate. In the meantime, the extra income earned would go to the beneficiary
Often the same trustees would control the inter vivos and testamentary trusts if they are set up by the same testator/settlor.
Work together
Inter vivos and testamentary trusts work together to provide for the beneficiary, as best determined by the trustees. If the beneficiaries are the same for both trusts then there is no obvious conflict with exhausting one but not the other. If the beneficiaries are different then this is a factor to consider – a variation of the “even-handed rule.”
Aside from trusts owning homes for beneficiaries so that parents know arrangements are in place while they are alive, inter vivos trusts are useful to hold money left as an inheritance from another source.
The inheritance would be left directly to the parent or sibling with a clear intention that it be used for the child. Putting it into an IVT brings clarity and asset protection.
- It is clearly removed from the estate of the parent to whom it was left for their care.
- It is beyond matrimonial claims.
- The income from it is not subject to tax in the hands of the parent but instead at a usually nil rate in the hands of the child but is still managed and invested by the parent who as trustee has full control over the fund
- A successor trustee can be named in this document, such as a sibling of the beneficiary.
Set up by parents
It wouldn’t be uncommon for an aunt, never married with no children, to leave part of her estate for her niece or nephew with special needs, but not be inclined to put a Henson trust – sometimes called an absolute discretionary trust, designed to protect assets as well as the right to collect government benefits and entitlements – into her own will. The inter vivos trust is set up by the parents of the child after the aunt has passed and left at the bequest to the parents for the benefit of the child.
Once established, inter vivos trusts are not set in stone. There is a procedure for the living settlor or perhaps the surviving trustee to make some necessary changes, and there can be multiple life beneficiaries if appropriate.
The trust may name alternate trustees in the document or there may be a provision for replacement trustees to be named by the last surviving trustee, while alive or in their own will.
Neither inter vivos nor testamentary trusts have any real impact on social benefits or supports. The asset in the trust is not the asset of the beneficiary and the income attributed to them is phantom income.
Not part of the estate
The trust assets are not part of the estate of the beneficiary, and pass on as directed by the will or terms of the IVT when the beneficiary dies.
It is worth noting that while it is possible to have the will of the beneficiary direct the distribution of the trust residue, it is a rare arrangement.
It is also possible to give the beneficiary the power to direct the trustee to transfer the fund to them at age 65 when provincial disability benefits end and Old Age Security and the Guaranteed Income Supplement comes in to play, but, again, this is very rare.
As well, the beneficiary could be named a joint trustee but this is not very practical and becomes a problem if the other trustee dies.
In the end, it makes sense to consult a lawyer when making your estate plans.
For more helpful disability and estate planning videos please visit my website.
