Inter vivos —created during your lifetime, as opposed to taking effect after death—are chosen for a variety of reasons. Two of the most common reasons are tax efficiency and personal needs, which are illustrated below through some real-life examples
1. Tax efficiency
Estate freezing, income splitting or minimizing executor’s1 fees and probate2 tax may be the driving factors for considering an inter vivos trust. Two types of trusts are most commonly used in these circumstances: (1) placing assets in trust for yourself and (2) placing assets in trust for your children and/or grandchildren.
- Placing assets in trust for yourself: As an example,3 Dr. Lemieux is nearing his 75th birthday. His main asset is a non-registered investment portfolio, which he is finding more and more difficult to manage. He has several objectives in mind when he visits his MD Advisor, ranging from investment management of his portfolio to the executor services offered by MD Private Trust.
After considering his potential tax consequences, Dr. Lemieux decides to transfer his portfolio to an alter ego trust. Both Dr. Lemieux and MD Private Trust serve as trustees (which means the ones who are responsible for holding and managing the trust’s assets). MD Private Trust also works with Dr. Lemieux to arrange for the management of the investments and administer the trust’s assets, and will continue to execute these responsibilities if Dr. Lemieux is no longer able to do so. The trust arrangement provides that, during the remainder of Dr. Lemieux’s life, income will be paid to him alone and no one except Dr. Lemieux may access the capital. Upon his death, the remaining assets are to be divided among his children.
By creating the trust, Dr. Lemieux has met his investment management concerns. He has created a vehicle that protects his assets should he suffer incapacity. He has succeeded in reducing his executor’s fees and probate tax, since the value of the trust assets will not be included in his estate and subject to probate. Estate administration should also be quicker and easier, while other benefits may include confidentiality and protection from claims against the estate.
- Placing assets in trust for children and/or grandchildren: Dr. Valdez has non-registered investment assets that exceed her needs, and she wishes to use the surplus funds to benefit her children and grandchildren. Her daughter is commencing a long-term course of study and her son is just starting a business that will likely take a long time to build.
Dr. Valdez has always generously supported her children and grandchildren out of her after-tax earnings. Now that she is financially comfortable, she is willing to earmark certain investment assets for their benefit. Given the current circumstances that her children face, however, she does not wish to pass ownership of the assets directly to them. Her ultimate strategy will depend on the composition of her investment assets and the tax consequences, but it may involve gifting the investment assets to a trust. Dr. Valdez would report a disposition of the assets gifted on her personal tax return, and would be liable to pay income tax on any capital gains.
The trust will allow the trustees discretionary payments of income and capital to the children and grandchildren as Dr. Valdez sees fit. Dr. Valdez will have “realized” her tax liability with respect to the assets by transferring them to the trust, while the future growth in the investment assets and subsequent tax liability will fall into her children’s hands through the trust. By making use of a trust, she will have shifted the tax burden on the investment income earned from her personal, higher income-tax bracket, to her children’s lower income-tax bracket while continuing to provide the same level of support. Executor’s fees and probate tax savings are added benefits. A potential drawback is that she has given these assets away, even though she still controls them as trustee.
2. Personal needs
In addition to realizing tax efficiency, inter vivos trusts can also be used to meet a number of personal needs. Here are some common examples:
- Dr. Brown’s wife has always found it difficult to adjust to new situations. As the years pass, she has become more and more dependent on Dr. Brown to interact with the outside world. Dr. Brown is concerned about what will happen upon his death, and how his wife will be able to deal with the various financial matters that will come her way. He has created a trust for his wife under his will, and has appointed MD Private Trust as trustee. Yet he still worries about how his wife will react to the trust company’s involvement in her affairs when he passes away.
Dr. Brown decides to set up a trust for some of his investment assets now, which can be managed by MD Private Trust as trustee. Dr. Brown can introduce his wife to the involvement of the trust company, such as how the trust funds are being invested. He can monitor and adjust the process while he is still alive to ensure that his wife will be comfortable, both financially and emotionally, upon his death.
Are inter vivos trusts for you?
These few practical examples clearly demonstrate the flexibility of inter vivos trusts for particular estate planning needs. Bring your situation forward to your MD Advisor and your Estate and Trust Advisor at MD Private Trust to determine if a trust may be suitable for you.