Advisor Opportunities Using Trusts Sandy Cardy Mackenzie Financial Corporation

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Advisor Opportunities Using Trusts Sandy Cardy Mackenzie Financial Corporation. Strategic use of trusts. ). Initiate tax and estate planning discussions Customize basic strategies RESULT: Increased satisfaction with your value Opportunities for business building . Topics to cover today:. - PowerPoint PPT Presentation


  • Advisor Opportunities Using TrustsSandy CardyMackenzie Financial Corporation

  • Strategic use of trusts

    Initiate tax and estate planning discussionsCustomize basic strategiesRESULT:Increased satisfaction with your valueOpportunities for business building


  • Topics to cover today:Why trusts?Basics of taxationCase studies:Asset protectionHandicapped beneficiariesBusiness SuccessionIncome-splitting testamentary trustsInsurance Trusts

  • Trusts Who is a prospect?Minor childrenSpecial-needs dependentsFamily members who are not financially astuteIncome-splitting Retirement planningCharitable givingInheritancesMarriageDivorceConfidentialityProbateFamily law property claims

  • Trusts

  • Case Studies

  • Trusts - inheritance planning- The Evans family

    Sam (22)SonHeather (20)DaughterRobert (85) + Emma EvansJohns ParentsJohn (56) Kate (55)

  • Case #1-Testamentary trusts

    Delay distribution of assetsControl over assetsSave on income tax

  • Johns inheritance of $1,000,000

    Direct Inheritance @ MTR of 45%Mackenzie Sentinel Corporate Bond Fund$1,000,0006% interest income$60,000Taxes payable$27,000Income retained$33,000Net annual savings through a testamentary trust

    Testamentary Trust @ graduated rates$1,000,000$60,000$16,000$44,000$11,000

  • Johns inheritance$60,000 Income $24,000 paid to beneficiaries $36,000Total Taxes = $8,000

  • The Power of Testamentary TrustsJoans $1,000,000 inheritance from his parents is generating $60,000 interest income annually.

  • Testamentary trusts - planning opportunitiesIncome splitting for high income beneficiariesIncome sprinkling for beneficiaries with dependant childrenDesignated income

  • Case #2 Insurance trust

    Vivian (68)Widowed but well off4 children3 successfully independent1 dependent on Vivian at age 36

  • Vivian dies?IssueUnequal sharingLegal wranglingFamily discord

    Possible solutionWill planningGiftingAlter Ego trustInsurance trust

  • Insurance trustsFunded with the proceeds of life insurance policyEstablished outside estate as separate trustBeneficiary designation pays proceeds of policy to individual - receives proceeds as trusteeDocumentation to establish an insurance trust:Last Will and TestamentTrust Declaration or Trust Agreement

  • Insurance trusts advantagesTaxed as testamentary trustProbate avoidanceCreditor proofConfidentiality

  • Case # 3 - Handicapped beneficiariesAmanda, age 6Father Life insurance proceeds $250,000Designated beneficiaryOptions availableIn trust for accountAnnuityFormal trust

  • Henson trustTrustee$250,000Fully discretionary Control of assets Prescribed beneficiary election

  • Case #4 - Jackson Tool & DieAge 56Wife Joan (55)ChildrenEric (27)Cody (22)Joanne (17)Bill JacksonOwner/ManagerJackson Tool& Die$5 million

  • Estate freeze - trustOperating CompanyTrustFamilyDebt andpreferredCommonsharesBill

  • Estate freeze - strategies to considerUse the capital gains exemption nowRecommend multiple wills

  • Estate Freeze - The real nitty grittyWhen to freeze will owner have enough value to live on in the future?

    How do you protect childrens shares from matrimonial claims?

  • Case #5 Asset protectionLou (70)Divorced married Anna Nicole 2 years ago3 children2 grandchildrenAnna Nicole (32)Divorced1 son

  • Lou dies first?Issue

    Family law issuesEstate depletionLous children disinheritedLegal wranglingFamily discord

    Possible solution

    Will planningGiftingAlter-ego trustSpousal trust

  • Alter Ego trust

    Protection of assetsControl of capitalConfidentialityJurisdiction shoppingProbate avoidance

    AssetsLou and/or Anna NicoleLou and/or Anna NicoleChildren

  • Mackenzie is here to help Client Service GroupSales RepsPrivate Client GroupTax and Estate PlanningMackenzie University

    In all there are as many as 2 dozen types of trusts in use today. Each meets a purpose or addresses an aspect of tax or common law. Although the terminology differs from province to province, the federal laws governing the taxation and administration of trusts are consistent throughout Canada.

    Before we launch into the case studies, Ill take a moment on the federal tax rules.Trusts can be classified as either testamentary or inter vivos:The primary difference between the two is how they are taxed. Intervivos trusts are taxed at the highest MTR. There is no income tax benefit to setting up an intervivos trust in your own province. Intervivos trusts can be u used for other non income tax purposes ex, alter ego trust can be implemented by seniors in several provinces to avoid probate fees on death. They can be implemented by parents to protect inheritances against the divorce of their child. Alberta trusts are set up by some very high net worth individuals where the trustees of the trust reside in alberta and thus used to take advantage of lower Alberta MTR.

    And there are some trusts that can be implemented through your estate to greatly cut taxes after death these are testamentary kind that are set up as a result of having been set up in someones will. Testamentary trusts are taxed On a progressive tax rate structure the same as an individual in other words the testamentary trust pays tax itself and files a tax return. I will be spending the next 10 minutes or so discussing testamentary trusts. These are my favourite estate planning tool because of the considerable income tax savings available with one of these. I just dont like what has to be done to get one of these you have to be willing to die to get it.Lets look at the Evans family. Robert and Emma are getting up in years. By planning ahead any inheritance John receives can attract less tax than if John receives his inheritance outright.There still are incentive trusts being set up to reward certain behaviour as long as it does not contravene public policy.

    Sophisticated tax planners now often advise clients to create testamentary trusts even in situation where there is no extraneous need for a trust.

    Testamentary trusts are one of my favourite estate planning tools. There are only 2 problems:Someone has to dieTestamentary trusts are inconsistent with probate avoidance strategies

    Additional Technical Content

    Income splitting the income tax savings will be more modest with smaller sums of capital to place in the trust at what threshold does this make sense when $200,000 or more is available for insertion into the trustA sprinkling trust is one which has a collection of income beneficiaries and provides the trustees unfettered discretion to select income beneficiaries to receive income allows the trustee to discard the even hand doctrine that would require the pool of beneficiaries to receive income on an equal basis (and in other situations to invest as to provide income and capital to satisfy capital beneficiaries needs as well)

    Designated income under the designated provisions of the ITA it is possible to pay that income out to the beneficiary while having the income taxed on the trust return.

    Additional Technical Content:

    Successive trusts: CRA has indicated that assets transferred out of one testamentary trust can be flowed into another testamentary trust ie spousal trustMultiple Trusts:creating a series of testamentary trusts out of a single estate is possible in some circumstances ie your client has 4 kids can create on test, trust for each and this expands the tax base for the family.Or each souse can establish 4 trusts in each of their respective wills now tax base is expanded with the addition of 8 new trusts. If the parents have an estate in the millions, the tax savings across the family unit can be in excess of $100,000 each year.

    Loss of Status as a testamentary trust (tainting)Contributions from the livingBeneficiaries paying capital expenses of the trust say wrap fees must be paid by trust not a beneficiaryFailure to distribute assets if this is the case the trust will be taxed as an inter vivos trust

    Additional advantage of a testamentary trust taxes are paid once annually rather than in quarterly installments that allows for ongoing tax deferral. Over 20 years or more, the cumulative value of that deferral can be significant

    Can also use incentive trusts to encourage certain beneficial behaviour. education, career, to encourage beneficiaries to be involved in community and charity work, to encourage spouse to say home with kids all is this is controversial but is possible and good for kids between 20 and 40 once someone is 40 they are as mature as they are every going to be.Thanks Carol. In this case youre dealing with Vivian, who is widowed and has more than enough money to live comfortably. She has four children three of whom are successful and financial independent. Her fourth child, Warren, has difficulty maintaining relationship as well as staying employed. Warren is 36 and still lives with Vivian. Although she loves all of her children, like many parents, she feels responsible for Warren and wants to ensure that if anything happens to her that Warren will be well provided for.Vivian has come to you asking how to provide a little extra for Warren in the event of her death. As in the first case, no planning for unequal sharing can lead to legal battles with the other children, and because of that, hurt feelings that can strain the family relationship.

    Your first step is to review with Vivian and her legal advisor just how Vivians will is constructed. Under her will she can leave extra for Warren with an explanation, and that may be all you have to do. She may want to consider gifting certain assets or cash to Warren during her lifetime, so she is certain that he has received them. Gifting appreciated assets could trigger capital gains tax to Vivian, so she should be made aware of that. Vivian could also consider an alter ego trust because of its ability to withstand will challenges by the other children. As you saw in the other case, there are a number of reasons Vivian could consider an Alter Ego Trust, so I wont repeat them here.

    Another alternative is for Vivian to consider an insurance trust, or an RRSP trust to provide for Warren upon her death.

    Page 74 poyser settlor must own policy and must be the settlors life that is insured

    Finicky care must be taken to ensure designation is properly drafted. Also care must be taken to ensure that the proceeds are no required for some other purposes for example to defray income tax liabilities anticipated within the clients estate on their death routing proceeds into an insurance trust can thwart that purposeAfter trust is put in place, care must be taken to ensure that the insurance designation always remains appropriately structured and not inadvertently changedMany lawyers will be completely unaware of the detail or may even be unaware of the general workings of an insurance trust specialized assistance is necessary and also can be costly

    Planning OpportunitiesWe dont need to use an insurance trust to avoid probate, maintain confidentiality or achieve creditor proofing all that can be done through a simple beneficiary designation. however to add income splitting opportunities, minor children and control for spendthrift heirs etc. makes the use of a trust great. I just want to reemphasize that even in situations where one traditionally did not contemplate the use of a trust, tax considerations alone make these tools attractive. Special allowance for Warren under an insurance trust could remain a secret if Vivian felt that the other children would be upset or challenge.Demonstrating the love and patience that only a parent can muster, Vivian can decide to leave extra money to Warren. Although her other kids may not feel good about this because they will feel that Warren should not be given a bonus simply because he was a disisater with money anything that goes into mums will is public she already has an insurance policy express provision in the trust deed that if Warren tells his siblings, then the income is to be curtailed In situations like this as with spendthrift trusts want to use forfeiture clauses to dissuade beneficiaries from wanting to bust the trust.

    Additional technical content the beneficiary designation on the insurance policy must not be irrevocableAs an alternative to a holding company structure, John can decide to use a trust structure in his estate freeze. A trust offers greater flexibility in its structure and control. The powers of the trustees can be strictly defined or they can be given full discretion as to how and when they pay out income or distribute capital to the family members. This is particularly helpful if John is unsure at the time of the estate freeze how he wants to allocate the growth in the value of the company among his family members. John can be the trustee and keep the control on how income and shares are divided. He can even decide several years later (or in his will) which children should inherit the business. The trust is not subject to refundable tax on investment income and can provide the same benefits as a holding company. These include:Multiplying the $500,000 capital gains exemptionControl and protection of the assets from possible family law claimsProtection of the assets from creditorsIsolation of U.S. situs investments from U.S. estate tax

    I personally am more inclined to look first at a family trust, but many tax professionals favour the holding company. If management of the company is the only factor in the estate freeze, then the holding company is the best choice. If there are a number of other planning issues, or the operating company will be wound down, then a family trust can be the best route.Lou was long divorced before he met the lovely Anna Nicole. They married two years ago. Anna Nicole has a son from a previous marriage. The two families are not especially close, but they attend family gatherings peacefully. Lou has no personal financial concerns, but has come to you to find out what arrangements he should be making to ensure a smooth transition of his estate in case he dies or becomes incapacitated. He does not trust that his children and his wife will continue to get along if he is not there.The biggest concern that Lou has is that he feels his children have the opinion that Anna Nicole married him for his money, and although he has never addressed it, he wants to put plans in place that will guard against that possibility.In a case like this, there are a number of issues to consider in your discussions with Lou. First, because he and Anna Nicole are married, family law considerations how much is Anna Nicole entitled to under provincial law. In most provinces 50% of marital assets. In most provinces, if Lou does not provide the equivalent of this for her, Anna Nicole can contest the will. In the event of Lous disability, he needs to have a safeguard in place that will prevent his wife from total access to his assets. Although Lou doesnt think Anna Nicole would be unfair, he wants to ensure his assets and his interests are protected, as well as ensuring that his children and grandchildren get their intended share of his estate. As his advisor, you can help Lou put plans in place to avoid any legal or family conflicts that may arise in the future.

    One of your first steps would be to work with Lou and his legal advisor to ensure his will is valid and still aligns with his intentions and family situation. In order to make sure that Anna Nicole and/or any of the children or grandchildren are adequately provided for, outright gifting of assets while Lou is alive and well is a possibility you might pursue. Then, due protection and control issues, you and Lou could consider either a spousal trust or an alter-ego trust. Well look at the alter-ego trust first.I have had several advisors ask me when to use an Alter Ego trust. There is still quite a lack of understanding with respect to these trusts. They are still being sold as probate avoidance and I would suggest that this advantage is not what should necessarily drive the process.Confidentiality, and control of capital are the biggest reasons for considering this trust in Lous situation. Lou is over the age of 65 necessary to establish this type of trust, so he can move assets in without triggering any capital gains tax on the transfer. He can include the principal residence, investments, income properties pretty much anything he owns. The trustee will manage the assets on his behalf, but disposition for tax purposes will not trigger at his death but should Anna Nicole survive him, deemed disposition will occur upon her death. Lou and Anna Nicole can use the assets during their lifetime, but if Lou is trustee with one of his children or someone else he trusts as contingent trustee, Anna Nicole cannot deplete the estate if Lou becomes disabled she will have to go through the trustee for any funds. Lou can then also include his children and/or grandchildren (including his stepson) as beneficiaries to receive the assets in the trust upon the death of the second of he or Anna Nicoles death. There are a number of other issues to look at, but you can see how this trust could be a good option for Lou. AIM Tax & Estate InfoService is committed to providing advisors with current and relevant tax and estate informationAs we are talking about general information, we always recommend that clients refer to their tax accountant or lawyer for their specific situation


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