IMPACT OF TRUSTS ON FAMILY LAW Ian Hull Hull & Hull LLP Stacie Glazman Synergy Valuations Inc.
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 of 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 of another person (the beneficiary) or for the advancement of 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 open 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
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