A trust is a legal entity which is separate from its settlor (the person transferring property to the trust), its beneficiary (the person who can benefit from the transferred property) and its trustee (the person who controls and administers the trust property).

Spousal Trusts: A trust that is set up through a will upon one's death is called a testamentary trust. A spousal trust is a form of a testamentary trust whereby specific property is set aside from the estate to be used to provide for the maintenance and support of the deceased individual's survivor spouse. Generally the income earned on the assets is paid to the surviving spouse, who also has the right to encroach upon capital if required.

Upon death, Canadian tax laws deem that a disposition of one's property occurs at its fair market value as at the date of death.  As a result, the appreciation in value of a deceased person’s assets can trigger income taxes payable on the deceased's final return. However if certain conditions are met, the assets transferred directly to a testamentary spousal trust are deemed to be disposed at their original cost, which defers the income taxes otherwise payable on their unrealized gains.

Creating a Testamentary Spousal Trust in a will can accomplish the following:

• Defers the income tax on the deceased’s unrealized capital gains until the death of the surviving spouse.

• Creates a seperate entity for tax purposes which  allows income generated from the transferred property to be taxed in the trust. This effectively doubles the lower income brackets available to each individual thereby reducing the income taxes on income generated by the transferred property.

• Protects the deceased individual's capital from exposure to potential creditors of the surviving spouse.

• Allows the deceased to appoint responsible trustees  to safeguard the capital in the Spousal Trust from inappropriate investments and risks.

• Helps ensure payment of the income generated by the assets in the trust to the surviving spouse.

• Helps insure that the deceased's capital is protected and will eventually be transferred to the deceased’s chosen beneficiaries after the death of the surviving spouse. This may be important in second marriages where the spouses have children from a prior marriage.

Notice

While spousal trusts can make sense in certain situations, the rules can be complex and this route should not be taken without first consulting with a qualified tax adviser.

Please contact Ken Shemie if you have any questions or comments.

For technical details refer to the CRA's IT305R4 "Testamentary Spouse Trusts".