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Specific Trust/Will Planning Situations

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Specific Trust/Will Planning Situations

Postby Pinskylaw.ca » 05 Aug 2017, 13:08

Disabled Spouse

If the client's spouse is already mentally or even severely physically disabled through Alzheimer's disease, stroke Parkinson's disease, or any other of the many degenerative diseases, the spouse is already incapable of managing his or her own affairs. To leave an estate to such a person would only necessitate further proceedings to ensure the individuals the individual's inheritance is managed. Especially if the well spouse has been managing the disabled spouse's affairs by means of power of attorney, and there is no alternative attorney, and there is no alternate attorney or co-guardian by court order, it is not advisable to leave the well spouse's estate outright to the disabled one.

A trust for the benefit of the disabled spouse, with proper trustees appointed to administer it, can ensure funds for the proper care of the spouse and will probably eliminate the need for further guardianship proceedings for the disabled spouse. A trust also ensures that any remaining capital on the spouse's death goes where the well spouse wants it to go, rather than by the disabled spouse's possibly outdated will or by the rules of intestacy.

A trust is open to an election against it under the Family Law Act, by the personal representative of the disabled spouse. Cases have held that an attorney for a disabled spouse can elect on his or her behalf under Family Law Act. Unless the overall value of the trust, when viewed in terms of the present value of the income interest, is as much or more than the equalization share that would otherwise be available, a trust for a surviving spouse, even one who is disabled, is open to defeat by way of an election under the Family Law Act. It is possible to determine a value for spousal trust, based on the anticipated income stream that can be generated, relative to the life expectancy of the surviving spouse. For a fully discretionary trust where the spouse has no automatic entitlement to income or capital, there is also no reliable way to determine a present value of the trust interest and in terms of looking at the existence of a trust in determining equalization numbers under Family Law Act, it is probably reasonable to attribute no value to trust interest.

Disabled Child

Disabled dependants such as children or siblings pose special problems. Often their earning capacity is greatly diminished and they are receiving various forms of social assitance such as disability pensions and subsidized housing. Because the threshold asset level past which the individual ceases to qualify for many of these benefits is very low, often a direct bequest to such a person is a real disadvantage. A modest inheritance, which will not produce enough revenue to support the handicapped individual, may disentitle him or her to benefits for as long as the funds remain, creating problem of getting the benefits reinstated when the inheritance runs out.

To ensure that the disabled individual will be able to keep the pre-existing benefits, but will have extra amounts from a trust, it is usually necessary to set up the disabled person's benefit in a fully discretionary trust. There should be no absolute entitlement on the part of the disabled person to receive either income or capital, but the trustee should have authority to make payments for extras such as additional clothing, services, travel, and particularly items specifically related to the disability. The preferred form of trust which obtained approval by the Ontario Court of Appeal in Henson Trust case, allows the trustee to make payments to or for the benefit of the disabled beneficiary, but only to the extent that the trustee decides to do so. The disabled beneficiary has no outright entitlement to the funds, which will go to other beneficiaries altogether when the disabled beneficiary dies. Therefore, no government agency looking for contribution to the costs of supporting the individual can require the trustee to pay any amount towards the maintenance of the disabled individual.

The new taxation rules for testamentary trusts make an exception for trusts for a disabled individual in that the graduated tax rates are still applicable in income retained in the trust. However, for the beneficiary and the trust for his or her benefit to qualify for such treatment, the beneficiary must be eligible for the Disability Tax Credit under the Income Tax Act. For an individual who has never had income other than Ontario Disability Support Pension (ODSP) payments and has therefore never filed tax returns, it will be necessary to secure the tax credit in any event in order to quality the trust income. In the case of Henson Trust that is created to supplement income for an individual who is not receiving ODSP but receives minimal income from other employment and also needs assistance to manage funds, it appears that there would not be any condition of the graduated tax rates for retained income and it would be necessary to at least allocate for tax purposes all of the income to the beneficiary.

If a beneficiary is disabled and entitled under the Income Tax rules to receive Disability Tax Credit, a fully discretionary trust for such a beneficiary will be entitled to have retained income taxed in the trust at the graduated rated that have been available for testamentary trusts in the past. It will be necessary for the beneficiary, or his or her personal representative, and the Estate Trustee to elect annually to have the trust treated as a qualifying Disability Trust. However, if the nature of the disability is such that he or she does not quality for the tax credit, a trust for his or her benefit will be subject to top marginal rates on all income taxed in the trust.
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