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What exactly is a “life interest” anyway?

In navigating the world of estate planning, you may have come across something called a life interest.

A life interest is a kind of trust. As a refresher, a trust is a three-way legal arrangement that splits the ownership of a property - the settlor establishes the trust, giving just the bare ability to own and manage the property to the trustee, and indicating that the property is to benefit or be for the use of a beneficiary.

A life interest is a trust with a bit of a twist - there are at least two beneficiaries. In the classic example of two - one can benefit from or use the property over the course of his or her lifetime, and the other receives the property or the remainder of it after the first beneficiary passes on.

These beneficiaries are called the income beneficiary and capital beneficiary respectively.

Due to its dual nature, a life interest can be a fantastic tool for helping family members meet long and short term needs. It can also provide a tool for compromising on an inheritance by sharing the value of a single asset among multiple beneficiaries.

The income beneficiary, also called the life tenant, will have access to use, benefit from, or profit from the assets in the trust for the duration of her or his lifetime, unless otherwise stipulated in the trust agreement. However, the life tenant is not granted access to the initial investment or deposit made in the trust, or if the trust pertains to real estate, cannot sell the property. At the end of the life of the life tenant, the asset will be passed on to the capital beneficiary, also called the remainderman. [I know, archaic language!]

In some cases, the life tenant may also be the settlor - or initiator - of the trust. In all cases, a trustee is required to guard the life interest. The trustee is responsible for making sure that the assets in the trust are handled with care and according to the instructions of the settlor, and that the capital beneficiary actually has something to possess when all is said and done. A trustworthy friend or family member, or an institution such as a bank may act as the trustee.

When should you use it?

A life interest can hold many types of assets.

Say, for example, you have entered into a second marriage and want your spouse to be able to live in the house for the rest of her or his life, but also want the children of your first marriage to eventually inherit the house.

Presto! A trust with a life interest would be an ideal solution!

You could name your spouse as the income beneficiary and your children as the capital beneficiaries.

Of course, it would be critical to consider upkeep costs. Somewhat simpler if the house happens to be a duplex, since one unit can be rented out to help absorb the costs of ownership. Also not an onerous issue if there are funds in the estate for the upkeep of the house.

Otherwise, a good approach would be to have the income beneficiary take care of those costs while benefiting from the use of the house - so, expenses such as a mortgage, utilities, taxes, maintenance, and repair.

It should be noted that, legally, the trustee is responsible for the property. However, it would not be ideal to have the trustee be out of pocket for costs like lawn care and roof shingle replacements. So, the “hook” is in making the income beneficiary’s benefit contingent on upkeep and care for the property, and having the income beneficiary sign a contract to that effect.

Otherwise, if the capital beneficiaries are faced with a significantly rundown house at the end of the day, a court case might be in the future for the trustee, and for the income beneficiary’s estate. Perhaps more importantly, the carefully laid plans of the settlor would have become a mess.

A life interest is usually stipulated as part of a person’s Will, but it can also be set up separate from a Will - it all depends on the settlor’s individual circumstance.

Live in Toronto, Ottawa, or elsewhere in Ontario, and think you might need some estate planning assistance that would see the use of a life interest plugged into your overall estate strategy in a smart and efficient way? Give us a call at 1-888-59-WILLS, or book a consultation right here on the website! We’d be happy to help you with all of your estate planning needs.

Get out of Trust!

So, here is a scenario:

A loving father dies, and leaves a hefty sum to a younger son in his Will. However, the sum is not simply accessible to the younger son. Instead, it has been placed in a trust, with an older son as trustee. The stipulation is that the trust will remain in place till the younger son reaches the age of 40. In the interim, the older son will manage the sum, and pay amounts out of the interest generated by the sum to the younger son, as the older son deems warranted.

You guessed it. The younger son is chafing at all of this. He is 22, he wants out of the restrictions, and he wants out now. Eighteen years of getting droplets is driving him up his living room wall. Does he have any hope of getting his money early?

The Reasons

First, it must be highlighted that there are likely valid reasons for the arrangement put in place by the father.

The younger son might be inclined to spend the entirety of his inheritance, even though he might also be unwilling, in his youth, to recognize that tendency in himself.

It might also be that the younger son is in a shaky relationship, and the father wants to buy some time for the relationship to stabilize or disintegrate before putting a large sum of money in the mix.

A third possibility is that the younger son might well be on his way to bankruptcy, and the father would rather not see his inheritance simply go to pay creditors.

The Words

Beyond the reasons, the younger son's first "port of call" must be the words on the pages establishing the trust.

Some trusts are more flexible than others.

For example, the trust document may stipulate that if the amount in the trust gets very small, it can be collapsed. That is unlikely to happen in this scenario, since the amount used to "settle" the trust is large, and the trustee is limited to paying out solely the interest on that amount.

Also, the trust document might empower the trustee to pay out the full amount in the trust if the trustee feels it is warranted. That, also, is clearly not the case here.

Thirdly, the trust might contain wording as to the principal reason it was set up. For example, to fund the younger son's very expensive educational ambitions. If the younger son has gone through the desired schools, there is some room to argue that the trust, by and large, has done what it was intended to do.

The Battle

Beyond the words, what looms if the younger son insists on turning his thinking into action is an uncertain court battle.

The starting point of that battle is, in law, called "testamentary freedom". In this case, it is the freedom of the father to decide on how his assets are to be distributed after his death. As a rule, testamentary freedom is to be respected. However, there are three reasons to depart from it:

(a) if dependants have not been adequately provided for - for example, a $1 million estate, with a two year old set to only benefit to the tune of $1000;

(b) if a beneficiary is "unworthy" - for example, a beneficiary who kills the testator in order to get at the estate "loot"; or

(c) if a Will violates "public policy" - for example, a mafioso's Will stipulating that every potential beneficiary must commit a crime in order to inherit.

Now, let's move beyond the starting point of the battle. Our younger son has been well provided for, he did not kill his father, and his father was no mafioso. Does he have any other options?

He does!

The rule in Saunders v Vautier, a court case from the early 1800s, might well provide him with an avenue. In brief, and as restated by the Supreme Court of Canada in Buschau v. Rogers Communication Inc., 2006 SCC 28 (CanLII):

"The common law rule in Saunders v. Vautier can be concisely stated as allowing beneficiaries of a trust to depart from the settlor’s original intentions provided that they are of full legal capacity and are together entitled to all the rights of beneficial ownership in the trust property … ."

In other words, our younger son has more than a snow ball's chance in hell of collapsing his father's trust.

That doesn't mean it's all easy-peasy-lemon-squeezy though.

We'll have to return to the words on the page setting up the trust.

For example, if the trust is set up to give the trustee (that is, the older brother) absolute discretion because the younger brother has a mental disability, the rule in Saunders v. Vauthier won't apply. Or, to put it in legal terms, "the rule does not apply to Henson Trusts".

If the trust document mentions another beneficiary and if that beneficiary does not want to collapse the trust, the rule in Saunders v. Vauthier might also not apply.

If a court determines that to collapse the trust would not be equitable … you guessed it, the rule in Saunders v. Vauthier won't apply.

So, it's a good chance that our younger son has, but not a certain bet.

Good chances that are not certain bets are, by the way, tailor made for court.

Smart Dad

In closing, it is worth noting that the father was smart in having the trust run for 18 years.

At 21 years, every trust undergoes what is called a "deemed disposition". It is as if the assets in the trust are sold at fair market value, and the government gets to hit the trust with a capital gains tax.

It is sort of the government's way of saying "enough already with this trust business".

It should be noted that this is despite the fact that the government would have been taxing the trust annually for any revenues anyway.

If you reside in Ottawa or Toronto or any other part of Ontario, and have any questions regarding trusts, feel free to give us a call at 1-888-59-WILLS. 
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The Henson Trust: Planning for the Future Care of a Partly-Dependent Child

Caring for a child with abilities that lie outside the norm can be difficult, but it can also be rewarding.

As a partly-dependent child grows into adulthood, social services such as the Ontario Disability Support Program (ODSP) become a crucial aspect of the child’s supporting system, and can help foster a sense of independence.

Inheriting assets from parents or grandparents - while always done with good intent - can be disruptive to that careful balance, since an increase in assets can render the child ineligible for the ODSP.

So, what to do? For the parents and grandparents of partly-dependent children, a tool that ought to be considered is the Henson Trust.

Guelph resident Leonard Henson cared deeply for his daughter, Audrey, who lived in a group home and relied on an allowance from the Family Law Act - now similar to ODSP payments - and on her father’s support.

Leonard carefully planned for the future needs and protection of his daughter by placing a substantial portion of his savings into an Absolute Discretionary Trust before his passing in 1981.

Think of a trust as a tool that separates “ownership” from “benefit”, since this is possible legally. For example, you can give $20 to your brother, and say “you own it, but you can’t use it; you must instead take care of it, and it must be given to my daughter exactly 10 years and 45 days from today”. That is what Leonard did. However, he took it one step further by making it “absolutely discretionary”, which means in the example above, he took out the “exactly 10 years and 45 days from today”. The result, in the example, is that your brother has the full discretion to decide when your daughter gets the $20.

So, an Absolute Discretionary Trust is one regarding which the person setting up the trust - the settlor - has given up all the “strings” of control; and regarding which the person benefiting from the trust - the beneficiary - cannot access at will or based on any condition other than the discretion of the trustee. The trustee, of course, is the person entrusted with the assets in the trust.

Now, back to Leonard’s neat story. The Ministry of Community and Social Services understood the trust he set up to be a gift to Audrey, and so they halted Audrey’s allowance payments. The Social Assistance Review Board reversed the Ministry's decision on the grounds that Audrey did not have direct access to the assets, and as such it shouldn’t be counted as an asset under her ownership. In 1989, this decision was upheld by the Ontario Court of Appeal, and it meant that Audrey’s social assistance payments would continue!

So, when is a gift not a gift and yet the person gifted can benefit from it? When, of course, it is in an Absolute Discretionary Trust.

Audrey’s good fortune created a road map for other partly-dependent children in Ontario, whether their differing abilities be cognitive, developmental, physical, or mental. Such a framework is also available for families in British Columbia, Manitoba, New Brunswick, Nova Scotia, and P.E.I.

The Henson Trust is named after Audrey and continues to provide families with a means of giving a child living with different abilities an inheritance without putting the child’s ODSP supports at risk. Eligibility for ODSP requires an individual to own less than $5,000 in assets - excluding their primary place of residence. Such an extremely low threshold puts partly-dependent persons at risk in the long run, which is why the Henson Trust is such a valuable tool in estate planning.

Now, it isn’t just about the Henson Trust. It’s also about the review of the trust document by the government offices that administer the ODSP. They must assess the trust document, and conclude that it is indeed a “Henson Trust”. This is important since, just as every partly-dependent person is unique, the Henson Trust document drawn up for each is also unique. There simply is no one size fits all. Yet, that unique document must obey some key rules established by the one drawn up years ago by Leonard’s lawyer.

Beyond the government review, it is also about the rules that have been put in place for annual transfers from the Henson Trust. The transfer cap is low, but there are exceptions for attendant care, wheelchair accessibility devices such as ramps, vehicular alterations, and modifications to the home.

Thirdly, it is about who is chosen as a trustee. It is important to identify a good trustee. Someone, or an institution like a bank, that can manage the trust with a clear mind and good character for a long time - until the trust runs out or the beneficiary passes on. The trustee will be responsible for releasing funds, managing and investing assets, and preparing records and tax returns, among other things. The trustee must understand the requirements and limitations of that role, including some knowledge of regulations under the ODSP and the Trust Act.

A Henson Trust is often established in a Will, but it can be created at any time. The benefit is that a Will is activated after the settlor passes on. Trusts that are activated before the settlor passes on are taxed at a higher rate!

If you believe that a Henson Trust may be a good option for you, and you are resident in Ontario, we can readily assist as estate planning lawyers. We have offices in Ottawa and Toronto, and can provide services in most other parts of Ontario. We can be reached by phone at 1-888-59-WILLS. There are a number of ways in which leaving an inheritance to a child with different abilities can unintentionally go awry. We are committed to ensuring that does not happen to your child or your family.

What, exactly, is a trust?

A trust is an arrangement between three entities - the grantor (or settlor), the trustee and the beneficiary.

The process is initiated by the grantor - the individual who wishes to give away assets by placing the assets in a trust. The grantor places the responsibility for those assets in the hands of the trustee.

The trustee is accountable for ensuring that the assets are received by the beneficiary in the manner intended by the grantor, which is outlined in the trust document.

Here is where it can get interesting - in some cases, the grantor and the trustee may be the same individual. So, a person can say to herself or himself - “I no longer own this property for myself, I now own it only to take care of it for the beneficiaries.”

In other cases, the trustee may be a trusted person or persons, or a trusted institution such as a bank.

There are two main categories of trust. The first is an inter vivos trust, also called a living trust, established during the life of the grantor with the assumption that the grantor will be able to control or witness the distribution of the assets in the trust. In most instances, the terms of such a trust may be altered at any time at the will of the grantor, and so it is typically termed “revocable”.

The second type is called a testamentary trust, which is usually created as a part of the grantor’s Will. Since it “kick-starts” upon the death of the grantor, it is always “irrevocable”. Once kick-started or established, an irrevocable trust is nearly impossible to change.

The above two categories have many sub-categories. So,

  • a spousal trust ensures that any income generated by the assets in the trust go to the surviving spouse following the death of the grantor, with the principal often being passed on to the children;

  • a real estate investment trust (REIT) is a great vehicle for storing assets such as rent payments; it often comes in the form of large holdings that get traded on the stock exchange, but there is no reason why a landlord with a few holdings can’t set up one for the next generation;

  • a charitable remainder trust is similar to the spousal trust, with the twist that instead of the children, the principal goes to a charity after the surviving spouse (or anyone else set up to benefit from the income) passes on.

There are many others.

Why set up a trust?

The main reason for creating a trust is to ensure that the assets within it will be managed in a specific way, and that such management will be guaranteed even following the death of the grantor.

This can be especially useful when the beneficiary is very young, irresponsible, or otherwise unable to manage the assets alone. See our post about Henson Trusts for more information about leaving assets to a person living with abilities that are reduced or otherwise outside the norm.

Another reason to establish a trust is that the assets in the trust will bypass the probate system following the death of the grantor. This accomplishes three things:

  1. it provides a great deal of confidence and ease in the transfer of assets, compared to the probate system;
  2. it sidesteps probate court fees, which can add up - in Ontario it is $250 for the first $50,000 of an estate and $15 for each additional $1,000, with no upper limit; and
  3. it keeps the transfer of assets highly private, which a basic Will cannot do since probate is a public, court process.

Placing assets in a trust is a great method of protecting an inheritance and ensuring that it is directed to the intended beneficiary.

Who needs a trust?

Many people could use a trust.

As the number or volume of your assets increase, or the complexity of your estate deepens, establishing a trust becomes an increasingly attractive option. So, trusts are not limited to the wealthy. They should be considered by anyone developing an estate plan as a vehicle for simplifying the distribution of assets, or sidestepping thorny family issues by targeting a portion of the estate for transfer to a specific beneficiary in a carefully controlled manner.

If you feel as though a trust may be a good option to include in your estate plan, and you are resident in Ontario, we can readily assist as estate planning lawyers. We have offices in Ottawa and Toronto, and can provide services in most other parts of Ontario. We can be reached by phone at 1-888-59-WILLS. Trusts can be complicated. It is in the best interest of the grantor, trustee and beneficiary that the trust document is - with an eye to the legal pros and cons - an accurate reflection of all that is intended.
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