Use of the Bare Trust as an Estate Planning Tool
Your clients, who are an elderly US husband-and-wife, consult you on the devolution of ownership of the family cottage. It has been in the family for a couple of generations, and they intend it to be available "forever" for their family. They currently own it as joint tenants.
You go through all of the title holding scenarios with them – the family trust, the share Corporation, the non-share Corporation, the LLP and the dreaded LLC, and they finally settle on continued ownership by their own children.
You cannot avoid capital gains tax – there are some strategies to defer it, but in this case the longest deferral is to the date of death of the survivor of the current beneficial owners. Other than cautioning them to start collecting their receipts, there is not much you can do to assist them with their unavoidable dealings with CRA.
If the cottage is worth $1 million, which will attract estate administration tax (probate fees) of approximately 1.5%, and if we can avoid probate, then we will have saved them $15,000 in provincial taxes, plus the related administrative costs of obtaining probate itself. You can quite legitimately avoid probate in certain circumstances. This would appear to be one of them.
- Be sure their existing Will deals appropriately with the cottage – the intended owners are the designated beneficiaries of the property in the Will – not the mom and pop revocable living trust. US pour over Wills do not work in Ontario.
- Do a transfer from mom-and-pop to mom and pop and the 2 eldest children who are to be the ultimate beneficial owners, designating all "as trustees". The land transfer tax statement will be something like "beneficial owners to trustees for estate planning purposes."
- Do a bare trust acknowledgment wherein the trustees acknowledge that they hold the property solely for the benefit of mom-and-pop, as joint beneficial owners, and if they are trustees at the time of the death of the surviving beneficial owner, they will honor the instructions of the personal representative in the surviving beneficial owner's Will, which of course will be to carry out the provisions of the Will. Everyone signs the document.
- Do the appropriate declaration under the land transfer tax act for filing with the Ministry of Finance in Oshawa following the registration of the transfer, and file the declaration and copy of the bare trust acknowledgment.
- At the time of the transfer, there are no capital gains tax implications. The land transfer tax exemption filing is the only tax paperwork to be attended to.
- On the death of the 1st to die of mom or pop, the deceased's estate would have the usual issues and elections to make under the Income Tax Act, with the surviving spouse probably electing to take over the deceased spouse's tax position to defer payment until the survivor's death. Survivorship application filed to remove name of deceased trustee.
- On the death of the last to die of mom or pop, the deceased's estate has all of the usual valuation and filing obligations with CRA, and a survivorship application is filed to remove the name of the deceased trustee.
- The surviving trustees transfer the property from themselves to the beneficial owner(s) identified in the Will of the deceased. The land transfer tax act filing is made, from trustee to beneficial owner, using the bare trust acknowledgment and Will of the deceased as supporting evidence. Surviving trustees will be able to claim that the property has never been occupied as their matrimonial home.
- Title has devolved to the intended heirs without probate.
In 1989, the tax department (CRA) announced that it was reviewing its tax treatment of their trusts, and until the review was completed, it would in future take the position that the settlor of the bare trust remains the owner of the assets of the trust for all income tax purposes. It later announced it had completed its review, and it would continue to ignore the trust for income tax purposes.
The tax department stated that a trust would be considered a bare trust when 3 criteria were satisfied:
- the trustee has no significant powers and responsibilities, and can take no action without instructions from the settlor;
- the trustees only function is to hold legal title to the property; and
- the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.
Assumptions and cautions
- Make sure the land is either LT Absolute or LTCQ, so the land registrar is only interested in receiving a death certificate of the deceased registered owner, regardless of whether or not he is named" trustee" on title. Section 50, Land Titles Act.
- Make sure the settlor's spouse, if married, is included as one of the bare trustees. You do not want the joint interests of the trustees severed by operation of Section 38 of The Family Law Act.
- Make sure that the deceased's estate does not need to be probated in this jurisdiction for other purposes – if a bank or investment company or stock transfer agent requires probate, the cottage asset value will need to be included. This is why the procedure works best with nonresident clients – there is little likelihood of there being other assets in the jurisdiction requiring probate. For resident clients, forgotten share certificates, surprise inheritances, and other reasons coming out of left field can render the whole setup ineffective.
- Some revocable living trusts may meet the bare trust requirements of the CRA, but when the documents give trustees the discretion to appoint substitute trustees, and other commonly included powers, I am leery of the trust fitting within CRA's simple and restricted prerequisites.
Joel Kennedy, January, 2016
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