This article appears in the November 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Recent clarifications from the Canada Revenue Agency (CRA) have added flexibility to an estate planning tool for wealthy seniors and their spouses.
Transfers of property into inter vivos trusts typically trigger a tax liability because the assets are deemed disposed. But joint partner trusts can accept assets from Canadian residents over age 65 on a tax-deferred basis.
Only the settlor and their spouse (or common-law partner) can receive or use income or capital arising from this kind of trust, but in return, the taxable disposition occurs only after the death of the second spouse.
Although joint partner trusts have been around for more than two decades, the CRA only recently cleared up confusion over the status of transfers involving property jointly owned by spouses.
At a 2021 roundtable held by the Society of Trust and Estate Practitioners (STEP) Canada, the CRA said it would consider both spouses the creators of a trust established with jointly contributed property as long as each spouse is eligible to contribute to a joint partner trust (i.e., is over 65 and a Canadian resident).
Then, at the 2022 STEP roundtable, the CRA confirmed that trusts set up with jointly contributed property could accept subsequent transfers of property owned by either of the spouses alone and still benefit from the tax-deferred rollover.
“It’s very helpful to know that both spouses can contribute, because it removes some question marks and reduces the risk of duplication,” said Margaret O’Sullivan, managing partner with O’Sullivan Estate Lawyers LLP in Toronto. “Overall, [this position] offers a little bit more flexibility, which is always welcome.”
Before the CRA statement, clients who hoped to use a joint partner trust usually tried to avoid the ire of the CRA by relinquishing one spouse’s interest in jointly owned property ahead of a transfer by the other spouse, said Corina Weigl, partner and co-lead, private client service, with Fasken Martineau DuMoulin LLP in Toronto.
At the 2022 STEP roundtable, the CRA also confirmed that second-generation income derived from trust property could be attributed to the trust itself rather than to the settlor or their spouse.
“Some of these are technical rules with no real substance from a policy perspective, and you have to ask whether they should be tripping up people who wish to take advantage of this kind of trust,” Weigl said.
Many clients explore joint partner trusts as a supplement to their will as they approach retirement, said Wilmot George, vice president, tax, retirement and estate planning with CI Global Asset Management. While the terms of the trust provide for an ultimate beneficiary after the death of the surviving spouse, these assets will not form part of either spouse’s estate.
A joint partner trust “can be a very valuable tool for the right client, and certainly something to consider when estate planning,” George said.
The most obvious benefit of this arrangement is the reduction in probate fees, particularly in jurisdictions with higher rates. These include Ontario, where the estate administration tax is 1.5% on the value of all assets held in the estate after the first $50,000, and Nova Scotia, where the rate is 1.7%.
However, probate is not the only consequence of testamentary gifts that clients may wish to avoid.
“If an estate has some complexity, it can take some time to settle,” George said. “Assets that bypass to the trust avoid all those delays, putting the money straight into the hands of the trust beneficiaries in a more timely way.”
George added that a trust’s confidentiality is another big draw.
British Columbia’s estate laws make joint partner trusts uniquely attractive in that province, said Carol Bezaire, vice-president of tax, estate and strategic philanthropy with Mackenzie Investments.
Provisions in the B.C. Wills, Estates, and Succession Act give judges the authority to alter wills that do not adequately account for the maintenance and support of the testator’s spouse or children, and redistribute assets as the judge deems “adequate, just and equitable in the circumstances.”
In recent years, several independent adult children have succeeded in making claims against estates despite being disinherited by their parents. But the outcome would have been different had the assets been held in joint partner trusts, Bezaire said.
“Property in a joint partner trust doesn’t fall under estate administration, so it’s not subject to will variation,” she explained.
Bezaire added that, nationwide, joint partner trusts can be an effective alternative to another estate planning document: the power of attorney. For incapacity issues in particular, she said, trusts are better suited to the nuances of a person’s shifting mental competency in later life.
Settlors can act as their own trustee, but many appoint someone else to perform the duties or add a substitute trustee using the trust agreement itself to detail the precise circumstances in which the alternate can take over.
“Everything is crystal clear as to who’s in control, and when,” Bezaire said.
On the downside, Weigl said, joint partner trusts may not be suitable for U.S. citizens living in Canada. There is a risk of double taxation involving the engagement of U.S. estate tax laws, which do not distinguish between property of the deceased’s trust and their estate.
“There are situations where a joint partner trust doesn’t make as much sense, so you have to do a cost/benefit analysis to make sure it is appropriate in your case,” Weigl said.
O’Sullivan agreed. Because of the legal and other professional fees involved, she said, such trusts tend to be suitable only for those who own property of significant value.
“If you have less than $2 million in assets, you have to ask whether it’s worth setting up this extra trust if your only concern is saving probate fees,” she said, noting that such fees for an estate of that size in Ontario would be around $30,000. “It might cost you $10,000 to $15,000 just to set the trust up, and there are other ways to save on probate.”
The younger a client, the more weight they need to give to the ongoing expenses associated with the administration and management of a joint partner trust — including annual tax returns and professional advice on transactions, Weigl said: “If you’re looking at a longer life expectancy and smaller probate tax savings, then you have to start weighing whether it makes sense.”