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What exactly is a “life interest” anyway?

In navigating the world of estate planning, you may have come across something called a life interest.

A life interest is a kind of trust. As a refresher, a trust is a three-way legal arrangement that splits the ownership of a property - the settlor establishes the trust, giving just the bare ability to own and manage the property to the trustee, and indicating that the property is to benefit or be for the use of a beneficiary.

A life interest is a trust with a bit of a twist - there are at least two beneficiaries. In the classic example of two - one can benefit from or use the property over the course of his or her lifetime, and the other receives the property or the remainder of it after the first beneficiary passes on.

These beneficiaries are called the income beneficiary and capital beneficiary respectively.

Due to its dual nature, a life interest can be a fantastic tool for helping family members meet long and short term needs. It can also provide a tool for compromising on an inheritance by sharing the value of a single asset among multiple beneficiaries.

The income beneficiary, also called the life tenant, will have access to use, benefit from, or profit from the assets in the trust for the duration of her or his lifetime, unless otherwise stipulated in the trust agreement. However, the life tenant is not granted access to the initial investment or deposit made in the trust, or if the trust pertains to real estate, cannot sell the property. At the end of the life of the life tenant, the asset will be passed on to the capital beneficiary, also called the remainderman. [I know, archaic language!]

In some cases, the life tenant may also be the settlor - or initiator - of the trust. In all cases, a trustee is required to guard the life interest. The trustee is responsible for making sure that the assets in the trust are handled with care and according to the instructions of the settlor, and that the capital beneficiary actually has something to possess when all is said and done. A trustworthy friend or family member, or an institution such as a bank may act as the trustee.

When should you use it?

A life interest can hold many types of assets.

Say, for example, you have entered into a second marriage and want your spouse to be able to live in the house for the rest of her or his life, but also want the children of your first marriage to eventually inherit the house.

Presto! A trust with a life interest would be an ideal solution!

You could name your spouse as the income beneficiary and your children as the capital beneficiaries.

Of course, it would be critical to consider upkeep costs. Somewhat simpler if the house happens to be a duplex, since one unit can be rented out to help absorb the costs of ownership. Also not an onerous issue if there are funds in the estate for the upkeep of the house.

Otherwise, a good approach would be to have the income beneficiary take care of those costs while benefiting from the use of the house - so, expenses such as a mortgage, utilities, taxes, maintenance, and repair.

It should be noted that, legally, the trustee is responsible for the property. However, it would not be ideal to have the trustee be out of pocket for costs like lawn care and roof shingle replacements. So, the “hook” is in making the income beneficiary’s benefit contingent on upkeep and care for the property, and having the income beneficiary sign a contract to that effect.

Otherwise, if the capital beneficiaries are faced with a significantly rundown house at the end of the day, a court case might be in the future for the trustee, and for the income beneficiary’s estate. Perhaps more importantly, the carefully laid plans of the settlor would have become a mess.

A life interest is usually stipulated as part of a person’s Will, but it can also be set up separate from a Will - it all depends on the settlor’s individual circumstance.

Live in Toronto, Ottawa, or elsewhere in Ontario, and think you might need some estate planning assistance that would see the use of a life interest plugged into your overall estate strategy in a smart and efficient way? Give us a call at 1-888-59-WILLS, or book a consultation right here on the website! We’d be happy to help you with all of your estate planning needs.

What is probate?

If you’ve ever had to settle the estate of a deceased loved one, you likely know what “probate” is. 

For anyone else, it’s just legal jargon.

Probate is the process through which a court effectively validates a Will - proving it to be true, accepting that the maker of the Will has died, and confirming that the Will is now a public document. Probate also grants the executor the legal authority to act.

In other words, probate legitimizes a Will in the eyes of the law. 

It also avoids problematic situations for institutions like banks. For example, a bank would not like to release funds to an executor pursuant to a 1982 Will of a deceased person presented by that executor, only to have another executor show up three days later with a 2015 Will of the same deceased person! Probate avoids that kind of mess.

So, how does it work?

The executor must apply to court to be granted a “Certificate of Appointment of Estate Trustee With (or Without) a Will”. Notice is given to anyone interested in the Will - usually anyone set to benefit from it.

Also, in order to know the value of the estate, there can be a detailed and sometimes lengthy process of locating all of the assets of the deceased and determining the value they hold. Non-liquid assets such as real estate and jewelry are priced at fair market value with the assumption that they were sold right before the passing of the deceased. 

The value of the estate is used in calculating the Estate Administration tax or “probate fees” of roughly 1.5%. This can quickly run into the tens of thousands depending on the size of the estate. However, there are legal strategies for reducing - or even eliminating - probate fees.

Also, the executor may have to put up a bond. That is for another day. There are legal strategies to help the executor - and ultimately the estate - avoid this headache also.

Once all of the legal, valuation and accounting paperwork is in order, the court ensures the Will is valid, and ensures that the executor is still willing and able to act. Then, the Certificate of Appointment of Estate Trustee is issued.

That ends the probate process, and starts the executor’s work.

Among the first things to do - final bills and taxes owed by the deceased must be deducted from the estate. Upon death, its debts before distribution. 

These payments can be little, or they can be substantial. For instance, capital gains taxes payable on any real estate that was not the primary residence of the deceased can be rather large, as can be capital gains taxes on any appreciation in the value of stocks held. 

To get slightly off topic a little - if a person dies without a Will (that is, “intestate”) in Ontario, probate is still often required. Further, the “debts before distribution” mantra remains in place. Regarding distribution - the Succession Law Reform Act provides that the estate of such a person is to be distributed with the first $200,000 going to a surviving spouse, and the remainder going to the surviving spouse (yes, again) and children. The distribution can change if a dependant of the deceased makes a claim.

So, how about reducing probate fees or sidestepping probate altogether at least for some assets? 

Well, there are definitely options for that. They can be a good idea because probate includes a tax on the estate, and makes the Will a public document. 

One option is two Wills for one person, with assets intended to be kept out of probate in one of the two Wills. 

Another is the joint holding of property, with survivorship rights. 

A third is the use of inter vivos trusts - that commence operation while the person with the estate plan is still alive.

A fourth is the gifting of the entire estate to a spouse or similar person using estate planning tools besides a Will.

If you reside in Ottawa or Toronto or any other part of Ontario, and have any questions about the probate process - about how to navigate its complexities, how to handle payments, or how to sidestep it in part or entirely, feel free to give us a call at 1-888-59-WILLS. 

Get out of Trust!

So, here is a scenario:

A loving father dies, and leaves a hefty sum to a younger son in his Will. However, the sum is not simply accessible to the younger son. Instead, it has been placed in a trust, with an older son as trustee. The stipulation is that the trust will remain in place till the younger son reaches the age of 40. In the interim, the older son will manage the sum, and pay amounts out of the interest generated by the sum to the younger son, as the older son deems warranted.

You guessed it. The younger son is chafing at all of this. He is 22, he wants out of the restrictions, and he wants out now. Eighteen years of getting droplets is driving him up his living room wall. Does he have any hope of getting his money early?

The Reasons

First, it must be highlighted that there are likely valid reasons for the arrangement put in place by the father.

The younger son might be inclined to spend the entirety of his inheritance, even though he might also be unwilling, in his youth, to recognize that tendency in himself.

It might also be that the younger son is in a shaky relationship, and the father wants to buy some time for the relationship to stabilize or disintegrate before putting a large sum of money in the mix.

A third possibility is that the younger son might well be on his way to bankruptcy, and the father would rather not see his inheritance simply go to pay creditors.

The Words

Beyond the reasons, the younger son's first "port of call" must be the words on the pages establishing the trust.

Some trusts are more flexible than others.

For example, the trust document may stipulate that if the amount in the trust gets very small, it can be collapsed. That is unlikely to happen in this scenario, since the amount used to "settle" the trust is large, and the trustee is limited to paying out solely the interest on that amount.

Also, the trust document might empower the trustee to pay out the full amount in the trust if the trustee feels it is warranted. That, also, is clearly not the case here.

Thirdly, the trust might contain wording as to the principal reason it was set up. For example, to fund the younger son's very expensive educational ambitions. If the younger son has gone through the desired schools, there is some room to argue that the trust, by and large, has done what it was intended to do.

The Battle

Beyond the words, what looms if the younger son insists on turning his thinking into action is an uncertain court battle.

The starting point of that battle is, in law, called "testamentary freedom". In this case, it is the freedom of the father to decide on how his assets are to be distributed after his death. As a rule, testamentary freedom is to be respected. However, there are three reasons to depart from it:

(a) if dependants have not been adequately provided for - for example, a $1 million estate, with a two year old set to only benefit to the tune of $1000;

(b) if a beneficiary is "unworthy" - for example, a beneficiary who kills the testator in order to get at the estate "loot"; or

(c) if a Will violates "public policy" - for example, a mafioso's Will stipulating that every potential beneficiary must commit a crime in order to inherit.

Now, let's move beyond the starting point of the battle. Our younger son has been well provided for, he did not kill his father, and his father was no mafioso. Does he have any other options?

He does!

The rule in Saunders v Vautier, a court case from the early 1800s, might well provide him with an avenue. In brief, and as restated by the Supreme Court of Canada in Buschau v. Rogers Communication Inc., 2006 SCC 28 (CanLII):

"The common law rule in Saunders v. Vautier can be concisely stated as allowing beneficiaries of a trust to depart from the settlor’s original intentions provided that they are of full legal capacity and are together entitled to all the rights of beneficial ownership in the trust property … ."

In other words, our younger son has more than a snow ball's chance in hell of collapsing his father's trust.

That doesn't mean it's all easy-peasy-lemon-squeezy though.

We'll have to return to the words on the page setting up the trust.

For example, if the trust is set up to give the trustee (that is, the older brother) absolute discretion because the younger brother has a mental disability, the rule in Saunders v. Vauthier won't apply. Or, to put it in legal terms, "the rule does not apply to Henson Trusts".

If the trust document mentions another beneficiary and if that beneficiary does not want to collapse the trust, the rule in Saunders v. Vauthier might also not apply.

If a court determines that to collapse the trust would not be equitable … you guessed it, the rule in Saunders v. Vauthier won't apply.

So, it's a good chance that our younger son has, but not a certain bet.

Good chances that are not certain bets are, by the way, tailor made for court.

Smart Dad

In closing, it is worth noting that the father was smart in having the trust run for 18 years.

At 21 years, every trust undergoes what is called a "deemed disposition". It is as if the assets in the trust are sold at fair market value, and the government gets to hit the trust with a capital gains tax.

It is sort of the government's way of saying "enough already with this trust business".

It should be noted that this is despite the fact that the government would have been taxing the trust annually for any revenues anyway.

If you reside in Ottawa or Toronto or any other part of Ontario, and have any questions regarding trusts, feel free to give us a call at 1-888-59-WILLS. 
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