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By Julie Cazzin with Ed Olkovich

Q: I am trying to figure out how to set up a trust that would distribute the earnings from the trust or find another vehicle that might work. My thoughts are these: set up a trust that pays out the earnings to my grandchildren and the payouts would be based on the previous year’s earnings (first year, no payouts). I would like this to be able to continue to benefit the children of my grandchildren and so on. I am 71 years old, married and my portfolio is approximately $1.3 million. My wife and I currently live half the year in Canada and half the year in Panama. My wife will most likely stay in Panama (her home country) when I die, so I would leave her $300,000 and the rest would go into the trust. I don’t want to rule from the grave, but I would really like to be able to help the grandkids. — Ralph

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FP Answers: It’s difficult to give specific advice without knowing your personal tax situation, but I can offer a few tips.

To start, tax advisers must determine your residency for your trust and the transfer of assets while you are alive. But note that planning solely based on tax rules is challenging. You must consider other family goals as well.

Ralph, you spend time in two jurisdictions each year, so you want to avoid paying tax in two jurisdictions. Where you are taxed likely determines the trust’s tax treatment. Do not confuse tax residency with domicile (where you reside). Where will you pay income taxes? This answer is determined by residency status and tax treaties.

There are two kinds of trusts to consider: living trusts created while you are alive, and testamentary trusts created at your death by your will. One option is to create a private, written trust agreement while you are alive. Let’s call this trust Ralph’s Living Trust (RLT).

Since you are older than 65, you can consider an alter ego trust (or a joint spousal trust with your wife). Under the Canadian Income Tax Act, these trusts’ income is taxed at the highest rates. Only you can receive income and capital from the trust while you are alive. On death, after income taxes are paid, the trust can benefit your grandchildren (or your spouse).

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If you qualify as a Canadian resident, transfers to these trusts may be tax deferred. The title to the assets must be transferred to the RLT. The RLT assets are not subject to probate tax when you die. They are not part of your estate, but are instead controlled by your trust.

Alternatively, you can create testamentary trusts with similar terms in your will for your grandchildren. Ownership is transferred on death by your public will to your testamentary trust.

Both trusts need trustees to manage their assets. You are the initial trustee or settlor of RLT. For testamentary trusts in your will, your executor can manage the trust’s assets. You can also name separate trustees to manage either trust, but keep in mind that independent trustees may charge fees.

Preparing any living trust documents with annual trust tax returns and filings can be expensive. The costs of making testamentary trusts in wills are not as high, but assets are subject to local probate taxes. Canada also deems, on death, that all capital assets have been at fair market value.

Consider deferring income taxes by leaving your estate in trust to your wife until she passes. What is left after her passing can go into a separate trust for your grandchildren.

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As well, consider non-tax factors such as family law and qualifying for health care. Each jurisdiction has different family and trust laws. Your grandchildren’s spouses may claim trust income for support if the couples separate. Trusts can also be subject to litigation challenges. If your wife has serious health issues, what you provide may be inadequate and she may have claims to your trust or estate.

Are you currently supporting your grandchildren? Are they minors? Also, have you already financially assisted your children? If not, why are you excluding them? Do you own real estate? Is the trust a possible foreign inheritance trust? These are important considerations. Your reasons can be private, but they should be noted by your lawyer.

Bear in mind that creating your private inter vivos trust means higher annual costs. But RLT may eliminate probate costs. Trust assets are not part of your estate. They are distributed by trust terms, not by your will, and, ultimately, you may still need a will for non-trust assets.

Edward Olkovich is an Ontario lawyer at MrWills.com. He is also certified by the Law Society of Ontario as a specialist in estates and trusts law. This information is not a substitute for legal advice. 

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