Stewart McKelvey

beneficiary. The beneficiary would have taxable income of $100,000 pushing him into marginally higher tax bracket. trust, the trust's income can be taxed in the trust at graduated rates. If the trust is a testamentary The beneficiary essentially earns two separate $50,000 incomes instead of one $100,000 income. It is important to consider that a testamentary trust must arise as a consequence of the death of someone. If money flows from a living person, or an inter vivos trust, to the testamentary trust, this will taint the trust and it will lose its testamentary status. The testator must also be careful to ensure that, if he establishes more than one testamentary trust, these trusts maintain their separate status including separate beneficiaries and separate trust- ees for each trust. This is to better ensure they are taxed as separate trusts. Providing for a spouse while preserving the estate A spousal trust is a special kind of testament- ary trust. Normally, when a person dies they are deemed to have disposed of their property immedi- ately prior to death. That means the deceased's estate may have to pay capital gains tax on this deemed disposition. When property is conveyed to a spouse or a spousal trust in the will of the deceased, this deemed disposition provision is sus- pended until the property is actually disposed of or the surviving spouse dies. A spousal trust has two special requirements: 1. The spouse must be entitled to receive all of the income of the trust; and, 2. No one other than the spouse may receive or obtain the use of any capital of the trust while the spouse is alive. People often must deal with blended families. A person may remarry but have children and grandchildren from a previous marriage. The new spouse may also have children of their own. One or both of the new spouses may want to provide for the other new spouse, but will want to ensure the capital of his or her estate passes to the children and grandchildren of the prior marriage. A spousal trust can help accomplish these parallel objectives. In his or her will, a spouse (the testator) may establish a spousal trust for a surviving spouse. The terms of which the surviving spouse is to receive the income of the trust property and, on the death of this spouse, the capital of the trust is to be dis- tributed to the children of the deceased spouse who created the trust. In this case, the spousal trust arises as a consequence of the testator's death, and is a testamentary trust. The capital of this trust may be distributed to other testamentary trusts that also arose as a consequence of the testator's death. Providing for minors A person may establish a trust to provide for min- or children or young adults who are not of suffi- cient maturity to handle large amounts of money. By using a trust, a person can place property into the hands of a trusted person or persons to use this property to provide for the needs and educa- tion of minors and young adults. A person may also wish to provide for a dis- Such a trust is called a Hen- abled individual. son Trust and is designed to maximize the public assistance benefits that may be available to the beneficiary. Passing of assets outside the estate A trust is one mechanism for a person to pass his property to his desired beneficiaries without this property forming part of the estate of the deceased. The residual beneficiaries could be another person or, if one chooses, a charity. Trust property not forming part of the deceased's estate has a number of benefits. First, property that passes through an estate can become subject to the claims of creditors against the estate. Passing the property through a trust may avoid these claims. Second, property that passes through a trust, rather than the estate, is not subject to probate tax. Third, trust property is not subject to the public probate process. Paul Coxworthy, partner St. John's, N.L. 709.570.8830 pcoxworthy@stewartmckelvey.com Michael McGonnell, associate Halifax, N.S. 902.444.1702 mmcgonnell@stewartmckelvey.com DOING BUSINESS IN ATLANTIC CANADA WINTER 2012 3

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