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Benefits of inter vivos trusts — Examples in action

Inter vivos trusts, also called “living trusts” are created during your lifetime for a variety of reasons. They are a way to manage assets today while at the same time planning for your estate.

Two of the most common reasons to establish an inter vivos trust are tax efficiency and personal needs.

1. Tax efficiency

Estate freezing, income splitting and minimizing executor1 fees and probate2 tax may be the driving factors for considering an inter vivos trust. Here are two of the ways you can use an inter vivos trust to increase tax efficiency:

Place assets in trust for yourself: Dr. Lemieux3 is nearing his 75th birthday. He has a significant amount in 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 Company (MD Private Trust).

After considering the potential tax consequences, Dr. Lemieux decides to contribute his portfolio to an alter ego trust (a specific type of inter vivos trust). Both Dr. Lemieux and MD Private Trust serve as trustees (which means they are the ones 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 rest of Dr. Lemieux’s life, income will be paid to him alone, and no one except Dr. Lemieux may access the assets of the trust. Upon his death, the remaining assets are to be divided among his children as Dr. Lemieux directed in the terms of the trust.

By creating the trust, Dr. Lemieux has addressed his investment management concerns. He has created a vehicle that protects his assets should he suffer incapacity. He has succeeded in reducing his executor 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.

Place 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 starting a long-term course of study, and her son just launched 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 facing her children, however, she does not wish to pass ownership of the assets directly to them. Based on the composition of her investment assets and the tax consequences, she decides to gift the assets to a family trust. Dr. Valdez reports a disposition of the assets gifted on her personal tax return and must pay income tax on any capital gains.

The trust allows the trustees to make discretionary payments of income and capital to the children and grandchildren as Dr. Valdez details in the trust deed when settling (that is, establishing) the trust. Dr. Valdez “realizes” her tax liability on the assets by contributing them to the trust, while the future growth in the investment assets and subsequent tax liability will fall into her children’s and grandchildren’s hands through the trust.

By using a trust, Dr. Valdez shifts the tax burden on the investment income earned from her higher personal income-tax bracket to her children’s and grandchildren’s lower income-tax bracket while continuing to provide the same level of support. Savings on executor fees and probate tax are added benefits. A potential drawback is that she has given these assets away.

2. Personal needs

In addition to realizing tax efficiency, inter vivos trusts can also be used to meet personal needs.

Place assets in trust for you and your spouse: Dr. Sharma’s 76-year-old husband is starting to show signs of early-stage Alzheimer’s. The Sharmas’ only daughter lives outside the province. Dr. Sharma is concerned that if something happens to her, her husband will not be properly looked after.

Dr. Sharma’s MD Advisor recommends transferring $1.5 million from their non-registered investment account into a joint partner trust (another type of inter vivos trust), with MD Private Trust as her co-trustee and MD Private Investment Counsel as the trust’s portfolio manager.

During Dr. Sharma’s lifetime, the funds can be used to care for her and her husband. However, if she becomes incapacitated or dies before her husband, MD Private Trust will continue to carefully manage the trust assets. MD Private Trust will also work with Mr. Sharma’s attorney for personal care to ensure that the assets are used to provide him with proper accommodation and supplementary health care for the rest of his life.

Inter vivos trust strategies

Whether you require an alter ego trust (for one person), a joint partner trust (for a couple) or a family trust, your estate and trust advisor will help you implement an inter vivos trust strategy that suits your objectives. These may include:

  • Incapacity planning: Provide for your own care in the event of illness or injury and ensure that your loved ones are always cared for.
  • Simplification of your estate: Allow for a quicker transfer of assets to your beneficiaries.
  • Minimizing probate tax and executor fees: Potentially save on probate tax and executor fees, since assets in a trust are not transferred under the terms of the will.2
  • Creditor protection: Structure the trust to help protect your assets.
  • Income splitting: Use the trust as an income-splitting tool (depending on the type of trust).
  • Privacy and confidentiality: Keep the contents of the trust deed out of the public record.

How to set up an inter vivos trust

An MD Private Trust Estate and Trust Advisor can provide you with clear, objective information about your options. For instance, working in collaboration with your MD Advisor, they will explain how an inter vivos trust can help create continuous, multi-generational financial security.

By appointing MD Private Trust as your professional trustee, you can be sure that experienced and caring professionals will always be there for you and your family, working in your best interests.

Before setting up an inter vivos trust for you and your loved ones, consider your circumstances — and theirs — carefully. Speak to an MD Advisor to determine whether an inter vivos trust is suitable for you.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

1 An “executor” is called a “liquidator” in the province of Quebec and an “estate trustee” in the province of Ontario.

2 In the province of Quebec, notarial wills do not require probate, whereas the majority of other wills do require probate and are subject to a fixed application fee. All references to probate and probate tax in this document should be read accordingly.

These examples are hypothetical and are for illustrative purposes only. They do not represent the financial situation of any actual client. Any resemblance to actual people or situations is purely coincidental.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.