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46 Cards in this Set
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compare and contrast different trusts: express trusts, resulting trusts, constructive trusts, testamentary trusts, and inter vivos trusts |
express trusts: trust docs signed resulting trust: minor/single owner for couple constructive trust: imposed against titleholder testamentary trust: enacted via will inter vivos trusts:enacted while alive |
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Requirements to create a valid trust |
capacity: settlor-age of majority, sound mind, solvent; trustee-can hold prop (not unincorp) constitution:property transferred three certainties: intent, subject matter (ben entitled to cap/inc interest), objects (ben name/cls) legality of purpose: ie cannot make broad restrictions, can't preclude future marriage unless specifying a specific individual |
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explain the perpetuity rules that could invalidate a trust |
under common law, property must be distributed/vest w/i perpetuity period: lifetime of a life in being + 21* life in being: person who was alive, or conceived but unborn, at the time the trust was created If prop might not vest w/i period, declared void *some prov have diff rules |
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Beneficiary Interest Classifications |
immediate: life interest future: remainder interest absolute: current interest - could sell even if life tenant possesses property contingent: interest exists upon future event fixed: specify exactly amt beneficiary to receive discretionary: trustee determines if/when & how much beneficiary is to receive |
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What types of "income" are capital beneficiaries entitled to before time/event occured |
Default provisions of common law entitle the capital beneficiary to capital gains or losses, recapture of capital cost allowance or terminal losses and any stock dividends The settlor may also give the trustee the discretion to define the interest of the income beneficiaries. |
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what happens to Income retained by the trust? |
-become capital at fiscal YE, if not to violating rights of income beneficiaries -Income attributable to a minor or a disabled beneficiary may be retained by the trust until required to support the beneficiary and such amounts are liabilities of the trust, not entitlements of the capital beneficiaries. |
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life tenant vs remainderman |
life tenant: entitled to a life interest in the capital property of a trust remainderman: person receiving capital interest |
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Vested vs. Contingent Interests |
Vested: given possession of the property or ready to take possession subject to certain conditions Vested absolutely:met all or no conditions Vested subject to divestment: vesting subject to condition that could terminate interest after the interest is created Contingent interest: interest will only come into existence upon the occurrence of some future event |
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How could intent not be clear and result in an invalid trust? |
If the settlor retains ownership of the assets or if the trustee can use the assets for his or her own use ie. CTB cheques ITF child, if no formal trust document and another trustee named, could argue that parent did not give up all control funds held in the trust for child |
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precatory trust |
transferor is relying on the moral values of the recipient to carry out his or her wishes -true trust has not been established -court could still find it enforceable |
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Why could a trustee be a corporation, but not an unincorporated association? |
-require capacity to hold property in his or her own name -unincorp are not separate legal entities and cannot hold property in their own names -unincorp could also not be beneficiaries bc not a separate legal entity |
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three certainties |
Intent: property to be transferred, settlor no longer owns, clear intention Subject Matter: property identified, not based on loan of property, specifies capital, income, etc. Objects: beneficiaries identified, could be unborn descendants, could be a purpose |
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spendthrift trusts |
spendthrift trusts: testator feels beneficiary could not wisely handle a lump sum bequest |
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Given less favourable tax treatment, why would one use inter vivos trusts NOTE: inter vivos trust retains its inter vivos status for tax purposes even after the death of the settlor |
-reduce future tax liability or the tax liability of the trust's beneficiaries -creditor proof assets, -estate freezing -property not expected to much income -income will be distributed as earned -income only be in the form of deferred capital gains |
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press Trusts vs. Resulting Trusts |
express trusts: intent expressed as transfer of property to inter vivos or established in will resulting trust: may form bc statues ie infant ben's bequest held in trust until 18/19 or where one party holds property, but intention of both parties that the titleholder was really holding his partner's share in trust |
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Income Tax Act treatment of revocable trusts? |
realized capital gains or income earned by a revocable trust will be attributed to the settlor |
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mere power vs trust power |
trust power: requires the trustee to distribute the trust income and/or property, while still giving the trustee the discretion to determine how that income or property is going to be divided among the beneficiaries mere power: does not impose an obligation on the trustee to distribute trust income or property to any of the beneficiaries |
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Why are Bare Trusts used? |
-beneficiary has the sole absolute interest in the trust property, as well as the right to demand possession of that property at any time -maintain confidentiality, to hold property in an agency relationship, or to defer or avoid paying property transfer taxes. |
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Who pays tax on Income earned by a testamentary trust? |
-taxable either in the hands of the trust, or in the hands of the beneficiaries -can also elect to have the income taxed to the trust even if it has been paid or is payable to the beneficiary |
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How does the CRA limit the mechanism for income splitting after death by creating separate trusts? |
A settlor cannot create two trusts for one beneficiary and still take advantage of the income splitting opportunity because both trusts will be considered as a single trust for tax purposes |
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PRO / CON of setting up 2 trusts for children rather than 1 combined trust |
PRO: if high income, each trust has own graduated tax level thus lower MTR CON: Cost of trust admin, limits trustee ability to distribute amounts per beneficiary need/income |
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How is property taxed when transferred from a trust to a beneficiary? |
rolls over to the beneficiary at the adjusted cost base of the trust distribution of capital property to the beneficiaries is not a deemed disposition |
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Consequence if T3 return and tax owing paid later that 90 days after the end of the trust's taxation? |
Late filing/payment penalty: penalty of 5% of the unpaid tax, plus 1% of the unpaid tax for each full month that the return is late, to a maximum of 12 months (higher if history of late filings) |
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If the trust has no tax payable, when would there be a penalty for not filing an information return by the required date? |
If trustee allocates or designates income to the beneficiaries and files the information return late OR if the trustee is late in distributing the required T3 slips to the beneficiaries -$25 per day, with a minimum penalty of $100 and a maximum of $2,500 |
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If an inter vivos trust for minor child, and assets were used to purchase shares of Nortel Networks, how is income taxed? |
Until child 18, interest, capital losses dividends and dividend tax credit will be attributed to parent. The capital gains will be attributed to child. |
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21-year Rule definition of the first deemed disposition date |
trusts are required to report a deemed disposition of most capital property on the first deemed disposition date and every 21 years thereafter - |
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way of working around the 21-year deemed disposition rule |
transfer trust property to beneficiaries according to their interests before the expiry of the 21-year period. Thus no deemed disposition & tax deferred until the beneficiary disposes of the property trustee must have the discretionary ability to distribute the property prior to the expiry of the 21-year period. |
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When may a trust reduce its tax liability by shifting the tax burden on the trust income to that beneficiary, even if it retains the income? |
using the preferred beneficiary election, if that person qualifies for the disability credit -Canadian resident who is the settlor's spouse, c/l (curr or former), child, grandchild, or great-grandchild, or spouse/cl to one of those persons -filed jointly by the trust and the preferred beneficiary -used often w inter vivos trusts (minor cannot shift div/int income) |
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How can you make income taxable in hands of beneficiary, without giving income to beneficiary? (assuming not diabled, thus cannot tax income in hands of ben while retaining income) |
-Income taxed to ben if paid or payable. -deemed payable if the beneficiary has the legal right to demand payment -issue a promissory note payable on demand to the beneficiary -paid directly to a 3rd party, private sch, camp -NOT payments for food/shelter/clothing bc CRA considers this benefit to parents, not ben |
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What ensures that 2 inter vivos trusts established by dad for daughters are separate entities for tax purposes? |
-trusts have different beneficiaries and are irrevocable |
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in order for the rollover provisions to apply to a testamentary trust, what three criteria must be met |
1 resident in Canada 2 pass bc death 3 vested indefeasibly (i.e., absolutely, without possibility of change) |
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What Constitutes a Spousal or Common-law Partner Trust? Taints? |
Spouse is only person who may receive the use of any income or capital during his or her lifetime Income dist cannot be left to trustee (must be distributed) Capital does not have to be dist. Taint: income/capital benefited anyone else |
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How to untaint a spousal trust? |
Purify by establishing a second trust to hold non-qualifying bequests. Ie. non-spouse ben renounce inheritance Note: trust assets used for testamentary debts not considered tainting |
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Taxation of Testamentary Spousal or Common-law Partner Trusts |
-Bc spouse entitled to all income earned by trust, it can be taxed to spouse or trust -Capital beneficiary rec's at ACB, and gains can be deferred until disposal. -Gains of property can essentially be rolled from spousal trust to child tax deferred |
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How is transfer of capital property to a "spousal or common-law partner trust", "alter ego trusts" and "joint spousal or common-law partner trusts" taxed? |
disposition is deemed to occur at fair market value upon the death of the transferor (in the case of an alter ego trust) or upon the death of the last surviving spouse or common-law partner |
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What is use of an Alter Ego Trusts? (cannot be set up until at least 65) NOTE: must specify that settlor only person w access to the trust capital & income during the settlor's lifetime |
fulfil the function of the will avoids the probate process not subject to public scrutiny more difficult to contest than a will protection from wasting/undue influence bc trustee must release assets NOTE: can be revocable, or conditionally irrevocable |
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Conditions of joint spousal trusts |
Same as Alter Ego (ie 65) Can convert Existing Spousal Trusts to Joint Spousal Trusts at age 65 -Can convert spousal testamentary trust to joint spousal trust (w new partner of widow) |
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Purpose and workings of Protective Trusts |
-any age -can be revocable -terminates upon settlors death, with assets reverting to ESTATE -settlor must be sole beneficiary -used to to protect misappropriation of estate -Alter ego trust better, bc can name capital beneficiaries to bypass estate, but cannot set up until 65 |
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PRO/CON of Family Trusts |
CON income attribution for minor children taxed to testator/testatrix (settlor) PRO future purpose when the beneficiaries are no longer minors PRO capital gains can be realized minor PRO: estate planning, spendthrift spouse |
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Spendthrift Trusts |
-designed to ration the trust's income and capital, with control in the hands of a trustee -some people choose to transfer property to an irrevocable trust for their own benefit (a "voluntary trust"), to protect themselves from their own spendthrift ways. |
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estate freeze |
minimize income taxes due at death as a result of the deemed disposition of capital property, by freezing that disposition at an earlier point in time so that any future gains accrue to the intended beneficiaries |
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Tax consequence of transferring capital asset to an inter vivos trust to effect an estate freeze? |
Unless the inter vivios is an alter ego trust (65+ & settlor is only life ben), there is a FMV deemed disposition. Future growth deferred till beneficiaries dispose of property. |
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Why would a settlor establish a life insurance intervivos trust? (Holds insurance policy prior to death of insured) |
(BC trust remains intervivos after death, thus taxed unfavourably) Hold policy on life of someone else. ie, MR owns policy on MRS life. If transfer to trust w son named as Capital Ben, then CSV will not form part of MR estate and son becomes owner of policy at ACB (or FMV at transfer to trust if not alter ego). |
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Legal lists vs. prudent investor principle |
Diff provinces give trustees broader investment powers List: Div stock, GIC, Bonds, Mortgages Prudent:MF's ok criteria to consider - economic, inflation, tax, role, return/income/capital, liquidity, income, capital, purpose |
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Duty to convert |
w/o power to retain trust assets in existing form & power to choose investments, DUTY to CONVERT ASAP to legal list |
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A trust set to end at age 21 can be ended at age 19 if: |
Beneficiary can demand that the trustee distribute the trust property if: 1. Beneficiary absolutely entitled to all of the trust property 2. age of majority 3. full mental capacity |
