CPABC in Focus November/December 2014 | Page 34

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