IMPACT OF TRUSTS ON FAMILY LAW Ian Hull Hull & Hull LLP - - PowerPoint PPT Presentation

Ian Hull Hull & Hull LLP Stacie Glazman Synergy Valuations Inc.

IMPACT OF TRUSTS ON FAMILY LAW

Dwayne Pyper - Moderator

• CPA, CA, CBV, Q.Med.
• Partner with Durward Jones Barkwell & Company LLP
• Over 35 years experience in public accounting
• Practices full time in the field of business valuations including

litigation support related to family law matters

• Qualified as an expert witness in several Ontario family

courts

• CICBV Board Member and Chair of Continuing Education

Committee

Ian Hull

• LL.B., called to the bar in 1990
• Certified specialist in estate and trust law and civil litigation
• Mediator
• Co-founder and partner at Hull & Hull LLP
• Author of four books on estate law issues – including the

seminal Probate Practice

• Lecturer at the Ontario Bar Admission course and guest

lecturer for the Canadian Bar Association and the Law Society

• f Upper Canada
• Recognized in Who’s Who Legal 2016 as an expert in the

provision of advice to high-net-worth individuals, families, trustees, family businesses and charities.

• Chosen by LawDay as one of the top 60 estate and trust

lawyers for 2009 and 2010.

Ian Hull

Ian M. Hull (on behalf of The Hull & Hull Professional Corporation) | Partner | Direct Line: 416.369.7826

• ihull@hullandhull.com | www.hullandhull.com
• 141 Adelaide St. W., Suite 1700 | Toronto, Ontario,

CANADA M5H 3L5

• Telephone: 416.369.1140 | Fax: 416.369.1517
• Subscribe to Hull & Hull LLP blogs and podcasts at:

http://estatelaw.hullandhull.com

• For information about our estate mediation services:

http://www.hullestatemediation.com

Stacie Glazman

• LL.B., LL.M., CBV
• The only litigation lawyer in Canada also qualified as a CBV
• Certified as a Specialist in Family Law by the Law Society of

Upper Canada

• Qualified as an expert in the Ontario Superior Court of Justice
• Has testified in court and arbitrations in both Ontario and

Alberta

• Author of many related articles and frequently speaks at

judge’s conferences, numerous law associations, the CICBV and others

Disclaimer

This presentation is intended for educational purposes only and does not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and not necessarily those of the Canadian Institute of Chartered Business Valuators.

Topics

• General Principles of Trusts
• Discretionary Trusts
• Family Trusts
• Inter Vivos Trusts
• Mechanics and Common Issues when Valuing Trusts
• Arbitration vs Trial
• Precedent setting cases
• Trust “do’s and don’ts”
• Sham Trusts
• Spousal Trusts
• “In Trust For” Trusts
• Tangential Trusts
• Choice of Trustee
• Impact of Trusts on Income for Support

INTRODUCTION

TRUST: an obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit

• f another person (the beneficiary) or for the advancement
• f certain purposes.

INTRODUCTION

Trusts can serve a variety of functions:

• Family trusts
• Trusts for unincorporated associations
• Trusts for charitable purposes

SIMPLE AND SPECIAL TRUSTS

SIMPLE TRUSTS: a trust in which the trustee is a mere repository of the trust property

• No active management duties
• Referred to as “bare trusts”

SPECIAL TRUSTS: a trust in which a trustee is appointed to carry out a particular scheme, created by the settlor

• Trustee must proactively exercise powers
• Trustee must act to fulfill settlor’s intention

THE THREE CERTAINTIES

For the creation of a valid trust, three things are necessary: 1. INTENTION

• The words must “so used, that upon the whole, they ought

to be construed as imperative” (Knight v Knight (1840), 3 Beav. 148)

2. SUBJECT

• The subject matter (trust property) of the trust must be

certain

3. OBJECT

• “The objects or persons intended to have the benefit of the

recommendation or wish” must be certain (Knight v Knight)

VALID TRUSTS

In order for the benefits of trusts to be available: 1. The trust must be properly constituted (3 certainties); 2. The trust should be evidenced in writing; 3. Detailed records should be kept of all transactions involving trust property; and 4. Proper legal and tax accounting must be completed each year.

BENEFITS OF TRUSTS

• Flexible estate plans
• Control flow of money to young beneficiaries, until they

are more mature

• Leaving money in trust may protect inheritance from

beneficiaries’ creditors

TAX CONSEQUENCES

Estate planning with trusts can reduce or eliminate certain taxes

• Creating a trust and a will can reduce taxes paid on

income earned on an inheritance each year

• Capital gains realized on a trust fund can be paid to the

beneficiaries, to be taxed in their hands at their marginal rate

• An inter vivos trust can be used to avoid probate fees

DISCRETIONARY TRUSTS

• Section 4 of The Family Law Act definition of property

“means any interest, present or future, vested or contingent, and real or personal property…”

• Factors:

i. The nature of the beneficial interest settled by the settlor; ii. The type of property settled; iii. The number of objects and whether additional classes of person may be added by the trustee or a third party; iv. Entitlements on default of exercise of powers of appointment; v. The past exercise of powers of appointment; vi. Powers of encroachment; and

• vii. Powers to resettle or amend the trust.

DISCRETIONARY TRUSTS

• Other factors to consider include:

i. Any evidence with respect to the founding intent of the trust. Was the trust designed to effectively allow control by the beneficiary? ii. The composition of the trustees, including whether the beneficiary is a trustee; iii. Any requirement, including veto powers, that the beneficiary be part of any trustee decisions; iv. Any powers of the beneficiary to remove trustees, or to appoint replacement or additional trustees; v. The relationship of the beneficiary to the trustees. Are the trustees independent or at arm’s length or are they family members or other persons who may not act independently?

FAMILY TRUSTS

Components to consider:

• What property to be held in trust and for what beneficiaries?
• Form of the trust in a trusted deed;
• Duration of the trust for 21 years at maximum
• Conditions to be set out in the trust

INTER VIVOS TRUSTS

Pros and Cons:

• Tax efficiencies?
• Protection of beneficiaries
• Inter-generational transfers

TRUST AUDITS

The CRA undertakes audits trusts from time to time.

• CRA commonly investigates receipt of trust property being

settled on a trust

• Even when 3 certainties are present, CRA holds certain

trusts are not validly created if they never received settlement property

MECHANICS OF VALUING TRUSTS

Unique estate and trust valuation considerations:

• Estate Administration Tax Act;
• Personal liability factors;
• Beneficiaries’ “views” on valuation;
• Calculating and considering executors’ compensation;
• Calculating and considering passing of accounts;
• Guardianship costs.

ESTATES ACT, SECTION 32

“Value of the Estate” means the value which is required to be disclosed under section 32 of The Estates Act (or a predecessor thereof) of all the property that belonged to the deceased person at the time of his or her death less the actual value of any encumbrance of real property that is included in the property of the deceased person. “…fair market value” is the highest price available estimated in terms of money which a willing seller may obtain for the property in an

• pen

and unrestricted market from a willing, knowledgeable purchaser acting at arm’s length.

COMMON ISSUES WHEN VALUING TRUSTS

• Value of the trust starts with the value of the underlying

asset.

• How much of that value, if any, flows to the

discretionary beneficiaries?

• How to reflect value for the purpose of net family

property?

• Potential contingencies.

ARBITRATION VS TRIAL?

Precedent-setting cases:

• Spencer v Riesberry, 2012 Carswellont 7589 (Ont. C.A.)
• Tremblay v Tremblay, 2016 ONSC 588
• Sagl v Sagl, 1997 CanLii 12248 (ONSC)
• Reisman v Reisman, 2014 ONCA 607
• Halliwell v Halliwell, 2016 ONSC 182

TRUST DO’S AND DONT’S

Sham Trusts

• Retaining control over assets by becoming sole trustee,

retaining veto power over other trustees

• Common uses in the context of offshore trusts
• Common law rules in validating a trust
• Control issues
• Evidentiary considerations

SPOUSAL TRUSTS

There are four ways property can be rolled “as a consequence of death” to a spouse or common law partner: 1. By will or other testamentary instrument; 2. On an intestacy; 3. By disclaimer, release, or surrender of a beneficiary under a will or on an intestacy; and 4. As a consequence of provincial laws relating to the spouse or common law partner’s interest in certain property.

SPOUSAL TRUSTS

After death, property is treated as being sold at fair market value for income tax purposes (ITA 70(5))

• As a consequence, tax may be owed on capital gains
• Capital gains tax is payable immediately by the

deceased’s estate

• Spousal trust may be a solution
• Transferring assets to a spousal trust allows control of

assets and possibility of tax-free rollover benefits

SPOUSAL ROLLOVERS

Subsection 70(6) of the ITA provides for a tax-free rollover

• Deemed disposition of property (and therefore capital

gains tax) is deferred if:

– The property is transferred to a spouse or common law partner;

• r

– The property is transferred to a qualifying spousal trust.

SPOUSAL ROLLOVERS

The spousal rollover will generally apply to transfers of property if: 1. The deceased and the spouse/common law partner were resident in Canada immediately before the deceased’s death (and the spousal trust is resident in Canada); and 2. The property vests indefeasibly within 36 months after the deceased spouse’s death.

“IN TRUST FOR” TRUSTS

• Undocumented trusts
• Informal trust arrangements in family law scenarios
• Are these trusts?
• What are the tax advantages?
• What are the tax disadvantages?
• When do children become eligible to access the trust

assets?

TANGENTIAL TRUSTS

• Incentive/purpose/productivity trusts
• What does it take to motivate people and what is the best

way to facilitate the development of a productive individual?

• Use and enforceability

CHOICE OF TRUSTEES

• Trustee Act requirements
• Common litigation issues
• Variation of trusts
• Resulting trusts
• Constructive trusts
• Secret trusts
• Residency requirements

IMPACT OF TRUSTS ON INCOME FOR SUPPORT

Issue:

• A court wants to identify factors that should be considered

when determining whether an amount received by a beneficiary of a trust should be included in income for the purposes of calculating support

• Is the amount included in income for purposes of income

tax?

• Is it the amount from capital that generates the income?
• Is capital compensation for loss of income?
• Has the amount, if capital, been equalized or is it exempt?
• Is the payment of the amount gratuitous?
• Is the payment of the amount recurrent?
• Were the funds typically used to finance a significant

proportion of the recipient’s living expenses?

IMPACT OF TRUSTS ON INCOME FOR SUPPORT

• Income received from beneficiaries who are support payors
• Treatment under Child Support Guidelines, Section 19 (1) (i)

”the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust”

• Factors to consider in imputing income

Wrap up

Input for future presentations: 1) Topic ideas? 2) Potential speakers? 3) Suggestions to improve sessions? Comments and suggestions can be emailed to:

• Dwayne Pyper at dpyper@djb.com, or
• Deborah Hanlon at Deborah.Hanlon@cicbv.ca