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David Allard

What is a Trust?

A trust is an equitable obligation binding a person (the trustee) to deal with property over which he/she has control (called the trust property) for the benefit of persons (who are called the beneficiaries) of whom he/she may themselves be one and any of whom may enforce the obligation. The person who creates the trust is referred to as the settlor that transfers legal title to the property to the trustee. This transfer of title to the trustee imposes a fiduciary duty on the trustee.

 

Classification of Trusts

1. Testamentary Trusts: a trust or estate that arises upon and in consequence of the death of an individual. It includes a trust created under the terms of a will or by an order of a court pursuant to dependants’ relief legislation.

2. Intervivos Trust: any other trust other than a testamentary trust, set up during the settlor’s lifetime.

 

Uses of Trusts in Estate Planning

As a trust possesses several unique features it is the perfect tool for estate planning. Some of the features are:

  • the separation of legal and beneficial ownership
  • the ability to create successive beneficial interests and thereby control the property over a considerable number of years
  • the flexibility that can be provided by conferring a variety of discretionary powers which may affect the selection of beneficiaries, types and timing of benefits and the investment and management of the trust property.

 

Common uses of trusts in estate planning are:

1. To provide for the maintenance and education of infants without powers of control or management

2. To provide a degree of financial independence for an adult child while postponing the time at which the child will obtain full management and control over the property

3. To provide for the care and maintenance of individuals who are unable, for medical or other reasons, to manage their own affairs

4. To provide for the care and maintenance of a spouse during their lifetime while controlling the disposition of the trust property on the spouse’s death

5. Tax planning objectives such as income splitting capital gains with minor beneficiaries or splitting dividend income from small business corporations to a lower marginal tax rate spouse or child.

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries.





Executors and their duties

There will be a time when you will need to decide who you should appoint as executor of your Will. As well, there may be a time when you will be asked by someone to act as the executor of his or her Will. In either situation, it is important to be clear on the duties of an executor before making your decision. This article will briefly outline the basic premise behind having a Will, and will then explain in more detail what an executor is, the duties of an executor, and what factors need to be considered when choosing an executor.

 

The Importance of Having a Will

A Will is probably the most basic of estate planning tools. A Will allows you to demonstrate how you wish your estate to be distributed upon your death. It also allows you to choose who will administer the assets that form your estate, and to specify how much authority will be granted to this individual (the executor). This individual may have to deal with a variety of issues such as family problems, unique assets, and determining who will look after minor children. If you do not have a Will then you will die "intestate." In this event, the "rules of intestacy" in any given jurisdiction will determine how your estate will be distributed. These decisions may be totally contrary to your wishes and this process will also undoubtedly significantly delay the settling of your estate.

 

What is an Executor?

An executor is someone appointed in a Will that is responsible for settling an individual’s estate after his or her death. An executor can be a person, one or more persons, or a trust company.

An executor may also appoint a trust company to do the administrative work of an estate on his or her behalf. It would not be unusual to appoint your spouse as executor, however, it would be prudent to appoint an alternate executor in the event that your spouse is unable or unwilling to act. The duties of an executor can be demanding and time consuming. In addition to dealing with considerable paperwork, it may also mean having to cope with tax laws, inheritance laws, family property laws and court procedures. At the same time, the demands of beneficiaries may have to be addressed as well.

 

Duties of an Executor

The duties of an executor, if listed item by item, could take four or five type written pages to outline. For the purposes of what may be helpful for you to know in order to make an informed decision, the common duties are as follows:

  • Locate the Will and contact all the beneficiaries.
  • Prepare an inventory of assets and liabilities forming the estate (assets must be listed by class with their value and full particulars noted which may involve arranging for appraisals of real estate or other personal property).
  • Obtain last 6 years tax returns and prepare and file any T1 returns that were not previously filed within 6 months after the date of death.
  • Notify all relevant insurance, health and pension benefit providers and file related claims.
  • Complete application for probate and make provision for any fees that may be applicable. (Note: If the deceased owned property outside of Canada, the executor must also determine if there is a valid Will for the jurisdiction the property is in. If there is no such Will, the applicable legislation must be determined. Any foreign tax liability, irrespective of whether there is a Will in place or not, must be identified as well.
  • Review the Will and determine an appropriate plan for the distribution of assets to beneficiaries.
  • File a Terminal T1 tax return and any other returns with Canada Customs and Revenue Agency and request a Clearance Certificate. (Note: Terminal period returns must be filed by April 30th of the year following the date of death, or by 6 months from the date of death, whichever is later.)
  • Review post-mortem tax planning opportunities, i.e. spousal trusts, income splitting opportunities, unused expenses etc.
  • Advertise for creditors and settle all claims and debts.
  • Prepare accounts for passing of assets and write to beneficiaries for approval.
  • Distribute assets to beneficiaries with a final report on all aspects of administration. One more thing to consider in this decision is the fact that an executor is dealing with the principles of common law and, in so far as he or she is in breach of trust, is liable for any mistakes or errors that may occur.

 

Selecting an Executor

If you appoint an individual as your executor you need to consider someone who has the ability to successfully complete all the related duties. You may also want to consider an individual who will be sensitive to the needs of your family. It is also wise to consider that when appointing an individual, he or she could predecease you. Unless you remember to update your Will, there would not be a valid executor at your death in this situation.

For these reasons you may want to consider appointing a trust company to act as your executor. These companies have the expertise to handle the duties and are "perpetual" so you need not worry if they will be there at your death.

Any executor may charge up to 5% in fees. This fee can be charged against the gross value of the assets that comprise your estate. This is the maximum amount as set out in the Trustees Act. However, most trust companies will negotiate the actual amount charged, and it will likely be determined by the size of the estate, its complexity and the success the executor has in settling it.

 

Making an Informed Decision

As you can see, there are many factors to consider when determining whether to appoint an individual or a trust company as your executor (and when determining whether or not to accept to act as an executor yourself). As long as you are aware of the complexities and duties that can be involved, your final decision will at least be an informed one.

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.

This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries.



Joint accounts: what you need to know!

Establishing a joint account may seem like a great strategy at first glance. However, there are many factors that must be considered before taking this action. This article will explore the use of ‘joint accounts’ and the related estate planning, control and tax issues and consequences related to these types of accounts.

 

What are Joint Accounts?

There are two types of joint accounts:

  • Joint Accounts with Tenancy in Common

With tenancy in common arrangements, each joint owner may or may not own equal parts of the assets. When one joint owner passes away, their share is left to their beneficiaries as designated in their will or the rules pertaining to intestacy.

 

  • Joint Accounts with Right of Survivorship (JTWROS)

The most common type of joint ownership is joint tenants with rights of survivorship where each individual has equal ownership and control of the assets. The joint owners do not have to be related, however, often they are spouses or parents/adult children. Upon the death of one joint owner, the surviving joint owners automatically receive ownership of the deceased’s portion of the assets. It should be noted that this type of ownership is not available in Quebec.

 

Why Open a Joint Account WROS?

There are several reasons people consider joint accounts. One being the administration of the estate becomes a lot easier because the “right of survivor” clause allows for the assets in the account to pass directly to the surviving joint owner. This results in the assets essentially bypassing the deceased’s estate. For this reason, many people open joint accounts to minimize or avoid having to pay probate fees (probate varies from province to province). Before placing accounts in joint ownership careful consideration must be taken. When joint accounts are set up, any joint owner is able to withdraw funds from the joint account at any time and does not need the permission of the other joint owner to do so.

As well, assets held in a joint account may form part of creditor proceedings if one of the joint account holders becomes insolvent or declares bankruptcy. These issues raise many questions that should be addressed before setting up this type of account. For example, in many cases spouses may be comfortable with this arrangement now, but if they were to experience marital problems a few years down the road, would each spouse still be comfortable with the arrangement? What if son or daughter was to experience marital problems of his or her own?

Another major area of concern revolves around parents naming their children as joint owners believing this is efficient from an estate planning perspective. The parents need to understand that they will give up full control of the account to their children? What if the children were to experience marital problems of their own?

 

Tax Implications – Deemed disposition and income tax consequences

The tax implications of setting up joint accounts are different if they are set up with adult children or spouses. This is discussed in more detail below.

According to CCRA, under the tax rules, a ‘disposition’ occurs when there has been a change in ‘beneficial’ ownership as opposed to a change in ‘legal’ ownership. While legal ownership implies ownership or title over certain assets, beneficial ownership differs in that it suggests that certain owners will derive some type of benefit (e.g. income) from the assets.

Where legal owners have beneficial ownership, each joint account holder is equally responsible for the tax liability and each owner will report earnings based on their portion of ownership (attribution rules may apply between spouses, as discussed below).

 

Setting up a Joint Account with a Spouse or Common-law Partner

If a joint account is set up with a spouse, the tax consequences of a deemed disposition are avoided because federal tax laws permit property to be transferred between spouses at the adjusted cost base (instead of FMV). In this situation, tax on the appreciated value of the asset can be deferred until the asset is actually sold. At that time, the gains would be attributed back to the spouse who contributed the assets to the account. Also, assets would pass directly to the surviving spouse, not pass through the estate and not be subject to probate.

Reporting income on joint accounts between spouses seems to cause many misconceptions.

Although an asset may be a joint account for legal purposes, CRA looks to beneficial ownership (not legal ownership) when determining who should pay tax on any income generated in the account. So, although a married couple may have a ‘joint account’, income or growth is to be reported for tax purposes according to the proportion of funds that each spouse contributed to that account.

 

Setting up Joint Account with an Adult child (over 18)

A transfer of property to someone other than your spouse or common-law partner may trigger immediate capital gains tax. For example, if three adult children became joint owners with a parent, ¾ of the asset would be deemed sold by the parent. If the asset had appreciated in value the parent would owe taxes in the current year. The future capital gains and losses on the asset and any future income on the assets would be reported proportionately for tax purposes by the parent and the three children. Note that in the case of bank accounts, GICs, T-Bills or similar fixed income investments there would be no tax consequences as a result of a ‘deemed disposition.’ Taxes are paid on these assets each year.

 

The Controversy…CRA vs. provincial legislation

Controversy revolves around whether or not the strategy actually avoids probate fees on assets that have been placed in joint tenancy with someone other than a spouse, when no disposition for tax purposes was claimed at the time of the change. CRA states that if there was no transfer of beneficial ownership and no disposition for tax purposes when the child’s name was added, then on the parent’s death the entire asset was owned by the parent and therefore should be included in probate. In fact, the child is acting as a trustee and not as a joint tenant.

However, the legal community will argue that since the administration of probate is provincially mandated, it has nothing to do with income taxes or CRA. In fact, legislation states that the value of an estate for the calculation of fees ‘does not include…property held in joint tenancy’ since they pass outside of the estate. But this brings back the issue of CRA claiming that a true joint tenancy arrangement does not exist if you merely add a child’s name to the title of the asset, so reducing probate fees is not achieved

 

Conclusion

While avoiding probate may seem like a great objective, individuals must be aware of the deemed disposition and attribution rules and must completely understand the control implications of establishing joint accounts. For this reason, transferring assets into joint ownership should never be done without professional tax and legal advice.

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case.





The emperor's new clothes

The wealth market faces increasing competition and declining product differentiation. The wealth industry is responding to these emerging trends with “new” and “unique” investment vehicles promising enhanced features, lower risk and low correlation to traditional stocks and bonds. The quest for something “new” and “unique” is driving investment strategies, service delivery models and new asset classes.

The one thing these opportunities have in common are layers upon layers of complexity - challenging investors to exercise additional due diligence. While some of these “new” opportunities are revolutionary, others are simply old ideas repackaged into a different layer of clothes. Linked notes, private placements, income trusts and structured products are all examples of investment opportunities promising something new and exciting while delivering higher returns. Exercising due diligence and asking the right questions is the only way of evaluating “the emperor’s new clothes”.

It is important to acknowledge that new opportunities, platforms and investment vehicles are constantly appearing. Some even change the investment landscape. The impact of the Internet as a delivery vehicle for investment platforms, and the impact retail hedge funds on asset allocation, are just two examples of how our environment has changed. At the same time, new ideas, new vehicles and new platforms also expose us to the unfamiliar. It is easy to feel overwhelmed listening to the “experts”. In those situations we face a critical fork in the road. We can either ask questions at the risk of feeling awkward, or we can follow the herd. Historical examples of herd mentality plague the investment industry. Remember the gold-rush? Or the more recent tech boom and subsequent bust? Or perhaps a U.S. example such as Long-Term Capital Management’s collapse will illustrate the ease in which we become trapped in the euphoria of “the latest thing”. However, as opportunities become more complex, the danger of lack of due diligence grows. What might be a recognizable warning signal in context of the familiar can easily be overlooked when buried underneath a new investment platform, delivery vehicle or investment structure.

The following are some key points to consider when evaluating new ideas:

 

1) Selling the sizzle or the steak?

Ensure you understand the fundamental nature, characteristics and risk of the underlying investment. Do not become distracted by “packaging” (capital guarantees, glossy marketing material etc).

 

2) What are the basic characteristics of the investment?

It is easy to get distracted by features, especially if the product promises tax efficiency, regular income distribution or some other desirable attribute. But the risks associated with a product are tied to its basic characteristics. Does it represent an equity or debt interest in something tangible? How stable is that interest? How reliable is the underlying asset? What recourse is available to you if things go wrong?

Exercising due diligence and asking the right questions is the only way of evaluating “the emperor’s new clothes”. … What might be a recognizable warning signal in context of the familiar can easily be overlooked when buried underneath a new investment platform, delivery vehicle or investment structure.

 

3) How suitable is the strategy?

If you don’t clearly understand the strategy and process behind the investment vehicle you cannot gauge whether it is suitable for you. Warren Buffet once stated that “he would never invest in something that he did not understand”. Throughout his business activities, it would seem that Buffet remained true to this principle.

 

4) What are the primary risks?

Under what conditions will the product under-perform? Every strategy has downside risk. If you don’t clearly understand the risks you need to ask more questions.

 

5) Who are the people?

Who are the individuals that are managing your money? What is their education and experience? Is the firm that they work for a credible, reputable organization? Are the individuals stable and cohesive, invested emotionally and financially in the success of the firm? Is the firm independent, answering only to its clients, or is it part of a larger conglomerate?

Most of the financial debacles of preceding years have been due to an entity or individual getting into trouble and trying to correct and/or cover up the problem. If you have doubts about the reputation, presence, ethics and quality of the personnel, talk to their competitors.

 

6) Process

Ensure there is some credible and repeatable process for adding value to your portfolio. That is the difference between an investment and a gamble. Investment is a process leading to a well-diversified portfolio, gambling relies on luck.

Many wealth management platforms combine advice from an advisor with the due diligence resources of an independent, unbiased organization. Trustworthy organizations use “due diligence managers” to assess and monitor products before they receive the necessary blessing to be placed on their wealth management platforms. The due diligence manager should be an expert at evaluating products and investment opportunities to determine if the “emperor has any clothes”. The quality of the due diligence manager is your protection from the “emperor’s new clothes”. They should be independent and objective. Ask about the quality, reputation and qualifications of the respective due diligence manager in order to find out how they evaluate and monitor products.

Do your homework and don’t follow the herd. Your savings take a lifetime to build, but momentary lapses in due diligence can do a lot of damage. Due diligence is your protection. Most of us don’t have the time, knowledge, skill nor resources to conduct adequate due diligence on our own.

Northern Trust Global Advisors 

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case.



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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

After two decades in the financial services industry, Jeff's experience as an advisor and branch manager define his approach to providing customized financial planning, estate planning, and managed income solutions. Key to this approach is a thorough understanding of the unique challenges and goals that exist in every client's life. He is a partner in Navigation Wealth Management.

Jeff holds the Certified Financial Planning and Chartered Investment Manager designations. He lives in Kelowna with his wife Tanya, and their two (almost adult) enterprising children.

 

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca







The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.



These articles are for information purposes only. It is recommended that individuals consult with a financial advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.


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