Spousal and Joint Partner Trusts – A Case Study
Highlighting Benefits and Important Tax Considerations
By Faizal Valli, CPA, CA
Faizal Valli is a senior manager
in tax services with Ernst &
Young LLP in Vancouver
specializing in tax and estate
planning for private clients.
Note to readers: The Department of Finance released draft legislation
on August 29, 2014, that proposes to make changes to inter vivos and
testamentary trusts, including eliminating marginal tax rates for testamentary trusts and amending the rules relating to the deemed disposition
of a spousal or joint partner (JP) trust’s property on death. At the time
of this writing, it is unknown to what extent the final legislation will be
implemented as drafted. This article does not address the proposed
changes.
S
pousal and joint spousal trusts, also known as joint partner
trusts, are typically used in estate planning for high-net-worth
spouses, including owner-managers, both as an alternative to
wills and for probate savings. Whereas a spousal trust is established
for the benefit of a settlor’s spouse, a JP trust is settled for the benefit
of a settlor and the settlor’s spouse or common-law partner.1 This
article discusses the use of inter vivos spousal and JP trusts, or trusts
created during the settlor’s lifetime.
The basics
A spousal trust may be created by a settlor at any age. By comparison,
only settlors who are 65 years of age or older may create a JP trust. In
the case of the former, only the settlor’s spouse is entitled to receive all
of the trust’s income and receive/otherwise use its capital while said
spouse is alive. In the case of the latter, only the settlor or the settlor’s
spouse are, separately or together, entitled to receive all of the trust’s
income and access its capital until the latter of the pair dies. Where
these conditions are met, property is contributed to the spousal or JP
trust at cost (i.e., on a rollover basis).2
A spousal trust has a deemed disposition of its property on the
death of the beneficiary spouse at the fair market value (FMV) of the
property,3 whereas a JP trust has a deemed disposition on the death of
the last remaining spouse. In contrast, an inter vivos trust has a
deemed disposition on its 21st anniversary. Spousal and JP trusts may
have any beneficiaries other than the spouses, but these beneficiaries
will not be entitled to income or capital until after the death of the settlor,
or of the last remaining spouse.
A case study
Consider the following hypothetical couple:
John and Jane Doe. John and Jane each own
50% of the common shares of their business,
Opco, and both are approaching retirement.
They have three children, one of whom will
eventually take over the business as part of
an estate freeze. Opco has a FMV of $10 million. In addition, John and Jane each have
non-registered investments with a FMV of
$5 million, plus registered investments, and
the H