A spousal trust is an effective estate-planning vehicle allowing one spouse to control how assets in the trust are managed and distributed for the benefit of the other spouse, and ultimately, for other eventual heirs. There also some tax advantages associated with the spousal trust.

A spousal trust (or common-law trust) can be set up as an inter vivos trust, meaning a trust created during the lifetime of the settlor (the person who creates the trust). Alternatively, it can be set up as a testamentary trust, created by will after the settlor’s death.

For a trust to be a spousal trust, it must meet two conditions: no individual other than the spouse for whom the spousal trust has been created can have access to the income generated in the trust every year; and the capital in the trust can’t be distributed to any individual other than that spouse.

“I don’t have to give my spouse a right to the capital [in a spousal trust],” explains Tim Cestnick, president and CEO of Toronto-based WaterStreet Group Inc. “It’s just that I can’t give anyone else a right to the capital while my spouse is still alive.”

Unlike most trusts, transfers of assets into a spousal trust do not trigger a deemed disposition, and thus an associated tax liability on any gains realized.

Spousal trusts are often useful in estate planning involving blended families. For example, in the case of a second marriage, an individual might create a spousal trust to leave assets such as property to the surviving second spouse for use during his or her lifetime. The transfer of the assets to the spousal trust is, as mentioned before, not a taxable event. However, once the second spouse passes away, the terms of the trust could dictate that the capital be left for the children from a first marriage.

“The assets can be distributed to the beneficiaries of my choice as opposed to flowing through the estate and being governed by the will of my second spouse or common-law partner,” says Wilmot George, director of tax and estate planning with Mackenzie Financial Corp. in Toronto.

Says Cestnick: “I can basically ensure that my kids from my first marriage get my assets, but I can defer tax until my second spouse dies.”

A spousal trust may also be useful in cases in which the surviving spouse is likely not to be able, whether because of disability or some other reason, to manage money.

“I can put the assets into a spousal trust and have a separate trustee manage the assets on behalf of my spouse,” George says. “The trustee can ensure that those assets last throughout my spouse’s lifetime.”

This is the final article in a three-part series on trusts.