Estate Planning for Clients Involved in Inter Vivos Trusts

An estate planning engagement would be incomplete without the review and consideration of your client’s ancillary contractual obligations, which might arise under, for example, a shareholders’ agreement, a marriage contract, or agreements relating to separation or divorce. Your client’s involvement in any inter vivos trusts, whether as settlor or trustee, should also be examined.

In recent years, we have seen a marked increase in the use of inter vivos trusts. Discretionary family trusts, once reserved for only the wealthiest Canadians, are now used regularly in tax and estate planning for professionals and other owner-managed businesses. “Alter ego” and “joint partner” trusts have also become relatively common since the 2001 amendments to the Income Tax Act permitting their use.

Although the decision to establish a discretionary family trust is typically driven by its tax advantages, a client’s estate planning objectives are integral factors when drafting an agreement governing an inter vivos trust. Specific considerations should include the succession of trustees, any restriction on the discretion of successor trustees, and the ultimate disposition of trust assets.

Because so many trusts are now in existence, estate planning lawyers should be inquiring about their new clients’ involvement as settlor or trustee in existing inter vivos trusts. A thorough review of the governing trust agreement (including any related documentation) and an understanding of the assets held in the trust will be required in order to ensure that the various pieces of the estate planning puzzle fit together.

The nature and value of the assets owned by the trustees of a trust will certainly have an impact on a client’s estate plan. For example, where the shares of a professional corporation are held by a family trust and the shares are expected to continue to be of nominal value going forward, the trust may become redundant on the death of the professional. On the other hand, the ultimate disposition of the shares of a business held by a family trust might be integrally tied to the client’s succession plan for his or her small business.

There are many specific ways a trust agreement might deal with the death or incapacity of its “principal”. Generally, these fall into three categories:

• The trust agreement might be silent on the issue;

• The trust agreement might specifically dictate successor trustees and/or the distribution of trust assets; or

• The trust agreement might refer to an external document for guidance – either a “letter of intent” or the principal’s will.

In the first two situations, where the trust agreement is either silent or specific, the client needs to understand who will be making decisions for the trust after his or her death, and how and when the assets of the trust will be distributed among the beneficiaries. If the answers to these questions are not satisfactory to the client, the choices might be to amend the trust (either pursuant to the trust provisions or by court order if necessary), to introduce a “letter of intent” in the hopes that it will guide the decisions of future trustees, or to reorganize a corporate structure to introduce a new trust containing satisfactory provisions.

In the third scenario, where the trust refers to an external document, the lawyer’s job is somewhat easier since he or she simply needs to ensure that the client’s wishes are appropriately specified as required by the trust agreement.

When drafting a trust agreement for a client, a lawyer should consider the following:

• Allow for flexibility in the succession of trustees – since most inter vivos trusts are intended to be long term planning tools, the appointment of successor trustees should contemplate changing personal circumstances. Marriages and parent/child relationships can falter. Consider linking the successor trustee(s) to the executor(s) named in the principal’s will. In this way, if the will is updated to reflect a change in executors, a similar change will also take place with respect to replacement trustees on a family trust.

• Consider limiting the discretion of trustees during the incapacity of, or on the death of, the principal.

• Providing for the ultimate disposition of the assets of a trust by way of a document external to the trust agreement will also provide flexibility for the principal of the trust to deal with changing personal circumstances and desired ultimate distribution.

Of course, there are likely to be tax implications to consider when undertaking estate planning for individuals holding wealth through a family trust. A tax professional should always be consulted when undertaking estate planning engagements for individuals holding wealth through an existing family trust.

One of the key benefits available through the use of the discretionary family trust is the “F” word of estate planning – “flexibility”. A trust can be tailored to the needs of a particular family and, if properly structured, should adapt itself to changing circumstances. It is vital that estate planning lawyers become familiar with these trusts and ensure that the specific provisions of any such trust are considered carefully in setting up (or revising) a client’s estate plan.

Disclaimer: This publication provides information only and is not intended to confer legal advice or opinion. If you have any further questions please consult a lawyer. Please note as well that many of the statements herein are general principles which may vary on a case by case basis.