ch 16 - Estate Planning Strategies

Question 1

trust

Answer 1

relationship created when the settlor transfers assets to the trustee who holds legal title to the transferred property for the beneficary

Question 2

trust document

Answer 2

provides instructions on how the assets are to be managed, and when and how they can be used by the beneficiaries

Question 3

4 DUTIES OF THE TRUSTEE

Answer 3

• conflicts of interest
• standard of care
• delegation of duties
• impartiality.

Question 4

Trustee Conflicts of interest (2)

Answer 4

• A trustee cannot profit from actions taken as a trustee.

* A trustee cannot acquire trust property or enter into contracts with the trust personally

Question 5

DELEGATION BY TRUSTEE

Answer 5

Trustee cannot delegate power and duties to another person.

Trustee may appoint professional help

Question 6

3 “Certainties” of a trust

Answer 6

Certainty of intention
Certainty of subject (trustee)
Certainty of objects (beneficiaries)

Question 7

Disadvantages of Inter Vivos Trust

Answer 7

• The procedures involved in setting them up are complicated.
• Legal and accounting fees must be paid.
• Tax must be reported annually.
• Settlors may be reluctant to give up control, wishing instead to use or benefit from the assets or investment
income.

Question 8

INTER VIVOS TRUSTS

Answer 8

Trust Set up during the setlor’s lifetime

Question 9

Express trusts

Answer 9

expressly state the terms of trust

Question 10

resulting trust

Answer 10

presumes that a person has a share in a property based on that person’s contribution

Question 11

Constructive trusts

Answer 11

formed when one party is unjustly enriched at the expense of another person.

The court imposes an obligation on the unjustly enriched party to compensate, or transfer property to, the deprived party.

Question 12

Life insurance trust

Answer 12

consists of the proceeds of one or more insurance policies

Question 13

Charitable remainder trust

Answer 13

set up with the purpose of benefiting the community or the public

Question 14

Spousal trust

Answer 14

testamentary or inter vivos trust created by a testator or a settlor for the benefit of a spouse

Question 15

THE 21-YEAR RULE

Answer 15

Under the Income Tax Act, a trust is taxed every 21 years, as if a deemed disposition

designed to prevent people from tying up assets beyond a certain period.

Question 16

2 REASONS FOR CREATING INTER VIVOS TRUSTS

Answer 16

ASSET MANAGEMENT

ASSET PROTECTION

Question 17

Benefit of Holding assets in an irrevocable discretionary trust

Answer 17

can protect the assets both from the beneficiaries’ creditors and from the beneficiaries themselves.

Question 18

assets at death in inter vivos trust from tax and estate perspective

Answer 18

• not subject to the deemed disposition rule at the time of that person’s death.
• The assets do not form part of the deceased’s estate and are not subject to probate;

Question 19

INDEMNIFICATION OF THE TRUSTEE

Answer 19

Trustees are often indemnified for any actions they take within the scope of the duties specified in the trust deed.

Question 20

Avoiding the 21 year trust rule

Answer 20

can rollover investments at ACB to the Capital beneficiaries

Question 21

What happens after the FAILURE OF THE TRUST because of a LACK OF BENEFICIARIES?

Answer 21

trust property reverts to the settlor

Question 22

Social trust

Answer 22

trust constituted for cultural, educational, philanthropic, religious, or scientific purposes

Question 23

Personal trust

Answer 23

constituted for free to secure a benefit for a particular person

Question 24

Private trust

Answer 24

trust created for specific purposes, such as maintaining or preserving property for a specific use

Question 25

General rule of trust taxation

Answer 25

When income, dividends, capital gains is earned in a trust is distributed to the beneficiaries, it is taxed in their hands.

Question 26

3 conditions to tax income from a trust

Answer 26

• The trust is a resident in Canada throughout the year.
• It is not exempt from tax.
• It is not a specified trust.

Question 27

2 conditions to tax multiple trusts as one trust

Answer 27

• all of the property of the various trusts is received from one person.
• The income accrues to the same beneficiaries

Question 28

Treatment of TRUSTS FOR MINOR CHILDREN

Answer 28

Capital and income is retained within the trust until the minor beneficiary reaches a certain age.

Question 29

how is foreign income from a trust treated^

Answer 29

deemed to be the beneficiaries’ income from foreign sources.
Can Claim a Foreign tax credit

Question 30

qualified disability trust

Answer 30

type of trust designed to benefit disabled individuals by permitting the lower
tax rates to apply to the trust.

Question 31

Conditions of a Qualified Disability Trust

Answer 31

• It must be a testamentary trust.
• It must be resident in Canada.
• It must make a joint election in its T3 tax return with one or more of its electing trust beneficiaries to be a QDT for the year.
• It must have income for the taxation year which does not exceed the dependant tax credit.

Question 32

A preferred beneficiary can be one of two types

Answer 32

• A Canadian resident who is a beneficiary of a trust at and who qualifies for the disability tax credit under the Income Tax Act.
• A Canadian who is an adult, dependent on others and who is either:
The settlor of the trust
The current or former spouse or common-law partner of the settlor of the trust
• A child, grandchild, or great-grandchild of the settlor of the trust, or the spouse or common law partner.

Question 33

4 cases where disposition rule doesn’t apply

Answer 33

• Transfer of capital property to a spouse or to a spousal trust
• Transfer of qualified fishing property to a child
• Transfer of qualified farm property to a child
• Transfer of personally owned property from an individual to a corporation

Question 34

ATTRIBUTION RULE for spousal rollover

Answer 34

if the spouse disposes of the property during his lifetime, any capital gain or loss is attributed back to the transferor.

unless the transferor is no longer married to the recipient spouse.

Question 35

main reason to freeze an estate

Answer 35

to limit the shareholder’s tax liability for potential asset growth

Question 36

How does an estate freeze work

Answer 36

shareholders must freeze the value of their specified growth assets, so that future growth occurs normally in the hands of their children or spouse.

the increase in value up to the freeze date is taxed in the hands of the estate

Question 37

traditional method of freezing an estate

Answer 37

use a holding company so that person can maintain control but beneficiaries still benefit from growth

Question 38

2 risks of Estate Freeezing

Answer 38

• Once an estate freeze is in place, any growth in the new common shares accrues to the children.
• Non-growth assets taken back by the shareholder or transferor, such as promissory notes or preferred shares,
may not provide adequate income.

Question 39

3 types of taxes arise at death

Answer 39

• Tax on income from the deemed disposition of capital property on death, as reflected in the deceased’s final personal income tax return
• Income tax on deemed proceeds of RRSPs and RRIFs
• Foreign estate taxes and succession duties

Question 40

4 income tax returns to file at death

Answer 40

• The deceased’s final personal tax return
• A second tax return for rights or things belonging to the deceased
• A third tax return if the deceased was a partner or owner in a business enterprise
• A fourth tax return if the deceased had an interest in the income of a testamentary trust

Question 41

what is RIGHTS OR THINGS

Answer 41

amounts that were not paid at the time

of death and had the person not died, would have been included in his or her income when received

Question 42

The following items are not rights or things:

Answer 42

• Amounts that accumulate periodically, such as interest from a bank account
• Bond interest accumulated between the last interest payment date before the person died and the date
of death
• Income from an RRSP
• Eligible capital property
• Canadian or foreign resource properties

Question 43

Two rules apply when disposing capital property at death:

Answer 43

• Unrealized capital gains are taxed in the deceased’s final income tax return
• A taxpayer is deemed to have disposed of all capital property

Question 44

The following reserves are not deductible at death

Answer 44

• Amounts receivable from property sold in the course of a business
• Unearned commissions
• Amounts receivable on the disposition of capital property
• Amounts receivable on the disposition of a resource property

Question 45

What can an allowance do if you have Capital losses?

Answer 45

capital Losses can be applied against other income to lower taxes

Question 46

graduated rate estates (GRE).

Answer 46

estate that arose on, and as a consequence of, the death of a person

GRE benefits from being subject to graduated tax rates for 36 months after death

Question 47

three techniques for POST-MORTEM PLANNING FOR PRIVATE CORPORATIONS AT DEATH

Answer 47

loss carry-back
pipeline,
bump.

Question 48

LOSS CARRY-BACK TECHNIQUE

Answer 48

creation of a capital loss in the estate’s first taxation year, which is carried back to offset capital gains at death.