The Joint Spousal and Common-law Partner Trust, an Estate Planning Strategy for Seniors

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The Joint Spousal and Common-law Partner Trust was introduced in the Income Tax Act in 2000. It is the equivalent to the Alter Ego Trust, but for couples. The strategy behind this new type of trust is to enhance estate planning opportunities for seniors.

Advantages of the Joint Spousal and Common-law Partner Trust include:

  • avoidance of estate administration tax on assets held in the trust by the settlor (person who creates the trust);
  • privacy and non-public disclosure of settlor's assets (a will becomes publicly available when validated by the court);
  • trustees to manage the assets should the settlor become mentally incapable without the need for a separate power of attorney;
  • creditor protection since ownership of the asset is transferred to the trustee (but the purpose of the trust cannot be to defeat creditors);
  • lower litigation risk compared to a will since intervivos trusts (which means it is created during the settlor's lifetime) are less easy to challenge; and
  • unlike other trusts,
  1. the Joint Spousal and Common-law Partner Trust is not subject to the 21-year deemed disposition rule and is instead deemed to be disposed on the death of the surviving settler or spouse (this can be advantageous because tax on the accrued gain on the underlying assets of the trust is deferred until the death of the original settlor),
  2. there is a tax deferred rollover of assets from the settlor taxpayer to the trust and the resulting capital gain or loss is taxed in the trust upon the death of the settlor.

Due to Ontario having one of the highest estate administration taxes in North America (ie, 1.5% on the majority of your probated estate), the use of trusts and dual wills are popular estate planning tools to gift more to your loved ones.

In order to create a Joint Spousal and Common-law Partner Trust:

  • the settlor must be at least 65 years of age, and resident in Canada;
  • no person, except the settlor and his or her spouse, may before the death of the survivor of them obtain the use of any of the income or capital of the trust;
  • no part of the capital of the trust is payable to anyone other than the settlor and his or her spouse during their lifetime.
  • the trust does not make an election regarding deemed disposition subparagraph 104 (4 )(a)(ii.l) of the Income Tax Act.

It should be noted that an inter vivos trusts, such a Joint Spousal and Common-law Partner Trust, are subject to income tax at the top marginal tax rate. When transferring assets to trustees, the settlor loses control over them and it may be prudent to appoint him/herself as one of the trustee to retain some control. On the death of the surviving settler or spouse, there’s a deemed disposition of the assets that are in the trust and capital gains taxes cannot be set against the settlor’s capital losses or capital losses in the trust can’t be set against the settlor’s capital gains.

Landmark Law Professional Corporation may assist in the preparation of your trusts and Estate planning matters.

Disclaimer: This article does not contain legal advice and only provides general information. It is not intended to replace advice from a qualified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this article before making decisions. Use of this article does not establish a lawyer-client relationship.

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Winnie J Luk, BA, JD, MBA, founder of Landmark Law, is a seasoned Ontario lawyer practicing in Wills and Estates, Real Estate, and Business Law and frequent speaker of free legal education seminar.