1. Disabled Spouse
If the individual's spouse is already mentally or even severally 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 spouse's inheritance is managed. Especially if the well spouse has been managing the disabled spouse's affairs by means of a power of 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capital on the spouse's death goes where the well spouse wants it to go, rather than by the disabled spouse's possible outdated will or by the rules of intestacy.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 the 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 a 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 the trust interest.
2. Disabled Child or Other Dependant
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 assistance such as disability pensions and subsidized housing. Because the threshold asset level passing which the disable 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 a further 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 is 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 Court of Appeal in Ontario v. Henson (a.k.a. Henson Trust), 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 disabled individuals in that the graduated tax rates are still applicable to 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 had income other than Ontario Disability Support Pension (ODSP) payments and has never therefore filled tax returns, it will be necessary to secure the tax credit in any event in order to qualify 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 continuation 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 a 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 rates that have been available for testamentary trusts in the past. It will be necessary for the beneficiary , or his or her personal representative, and 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 qualify 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. It must also be noted that there can be only one trust per disabled beneficiary that qualifies for the testamentary trust graduated rates. Therefore if parents and grandparents want to both establish discretionary trusts for the benefit of a disabled person, only one of the trusts can be qualified for the graduated rates.
3. Protective Trusts for Spouse of Adult Child
Most testators want to be sure that their beneficiaries are the ones who will really benefit from the inheritance being given. For the most beneficiaries, there is no problem. For certain others, careful planning is needed to ensure that the benefit actually goes to the intended beneficiary, and not to creditors, the tax department or some other government agency. If a beneficiary is in serious financial difficulty, a bequest from an estate may well settle his or her debts, but may not result in long-term benefit for the beneficiary or his or her family. If the beneficiary is an undischarged bankrupt, or about to declare bankruptcy, creditors have a right to claim their interest in an estate, if the interest is vested. Therefore, an outright bequest or trust where there is a guaranteed entitlement to income and/or capital, will benefit only the creditors of the beneficiary. The elimination of the graduated income tax rates for testamentary trusts will have an impact on the use of such protective trusts. They will probably continue to have a value, in order to keep funds out of the hands of the creditors of a beneficiary and such other protective purposes, but it is likely that such trusts will need to be drafted to ensure that all income is allocated and paid out to some beneficiary every year so that it is taxed at personal graduated rates and not at the maximum tax rates. When testamentary trusts were permitted to pay tax on income in the trust at graduated marginal rates, the accumulation of income in the trust and the taxation of it had some appeal. The loss of the marginal rate taxation for testamentary trusts that have existed for more than 36 months (past the point where the Graduated Rate Estate classification applies) makes accumulation of income in a trust very expensive from a tax perspective. If the alternative is simply providing funds that will go to third party creditors, such income accumulation makes sense, even with the inherent tax cost of doing so, but for most planning situations, most beneficiaries of accumulating income in a trust will be offset by the high income tax rates payable on it.
In an effort to keep his or her assets in the hands of the family only, many testators faced with the elimination of the graduated income tax rates for testamentary trusts will have an impact on the use of such prospective trusts. They will probably continue to have a value, in order to keep funds out of the hands of the creditors of a beneficiary and such other protective purposes, but it is likely that such trusts will need to be drafted to ensure that all income is allocated and paid out to some beneficiary every year so that it is taxed at personal graduated rates and not at the maximum tax rate. Such trust will provide for a fully discretionary trust. As such the trustees will make all determinations as to whether and how much income and capital the beneficiary will receive. Since there is no part of the trust to which the beneficiary is absolutely entitled, there is no part of the trust that can be attacked by creditors. A variation of the fully discretionary trust is a trust where in come is payable to a beneficiary as long as he or she is solvent. If the beneficiary makes an assignment in bankruptcy, is petitioned in bankruptcy, or is found to be insolvent according to some other definition, the trustee is then obliged to start paying the income and/or capital of the trust somewhere else. Often, the alternate beneficiaries will be the children or dependants of the insolvent beneficiary, in order to benefit the children of the original beneficiary.
4. Trusts for Minors, Grandchildren, etc.
Trusts of specific amounts or residue shares for minors, must be held by trustees until the minors attain the age of majority, provided the Will allows the trustees to hold assets at all. If there is no such provision in the Will, the trustees must pay the amount into court, to be held by the Accountant of the Ontario Superior Court of Justice, to be held until the age of majority. The tax rules which will increase the tax rates on testamentary trusts do exempt trusts for minors. Therefore, to the extent that there are trusts established simply to be held until the age of majority, income can be accumulated and taxed at graduated rates, or allocated to the child and taxed at his or her graduated rate, but still accumulated until the age of majority. For trusts where the intention is to hold some or all of the capital until the child is older than the age of majority, the top rates will be applicable to accumulated income once the child attains the age of majority. If an individual wants to leave relatively small sums for young children, it is wise to allow the trustees to pay the amounts to the parent or guardian of the child so that the parent or guardian is responsible for holding the funds until the child reaches the age of majority. Such a direction allows the executor to wind up the estate without the need to keep it open and file annual tax returns over a period of several years. Generally, a bequest of less than $10,000.00 does not justify an on-going trust to be maintained by the executor of the estate. In fact, the Children Law Reform Act specifically permits payment of legacies and other benefits for a child in amounts up to $10,000.00 to the custodial parent or a child. The parent receiving such funds is responsible for holding them for the benefit of the child. The tax rules which will increase the tax rates on testamentary trusts do exempt trusts for minors. therefore, to the extent that there are trusts established simply to be held until the age of majority, income can be accumulated and taxed at graduated rates, or allocated to the child and taxed at his or her graduated rate, but still accumulated until the age of majority. For trusts where the intention is to hold some or all of the capital until the child is older than the age of majority, the top rates will be applicable to accumulated income once the child attains the age of majority.
Many individuals feel that a young person of 18 is not ready to receive a large bequest, and they want to delay distribution of the funds until a later age, such as 25 or 30. If an individual wants to delay capital payment until after the age of majority, it is necessary to provide for alternate payment of funds, referred to as a "gift over". If the beneficiary can determine that the amount of the bequest or residue share is fully vested at age 18, meaning no other person or group can possible get the funds at any time in the future, the beneficiary can require payment at age 18, regardless of length of trust stated. The simple trust that leaves $100,000 "to my grandson at age of twenty five", can be collected by the grandson when he reaches the age of majority, simply by requesting it from the trustees. The interest is absolutely vested in the grandson because there is no one else who can receive the benefit. Even if the grandson was to die before the age of twenty five, the so-called rule of Saunders v. Vautier would ensure that his estate would be entitled to receive the bequest. Simple avoidance of the rule in Saunders v. Vautier is accomplished by providing that if the child or other beneficiary fails to reach a specified age, the benefit goes to his or her issue, if any. Until the beneficiary reaches the specified age, it will impossible to say with certainty that there will be no issue. If there were to be issue that would have a contingent interest, they would by definition be under the age of majority and therefore unable to agree to any early payment.
If funds are put into an inter vivos trusts for anyone under the age of majority, income earned will be attributed to the donor. Therefore, parents or grandparents who want to set up funds in trust for their children or grandchildren during their own lifetimes, will have to continue to pay the tax on the income earned by such trusts, as long as the beneficiaries are under the age of majority. If there are capital gains, they will not be attributed to the donor, but will be attributed to the trust or the child. If the income earned by the initial assets is reinvested, the next level of income is taxable in the trust, or can be allocated to the beneficiaries. The second level of income is not attributed to the donor. There is no attribution of income in the case of trusts created under will.