Chapter 6: Estate Planning Flashcards
What are the 5 types of gifts that can be made using a will?
- Specific bequest - gift of a specific piece of property.
- General bequest - gift of a specific amount.
- Devise - gift of real estate.
- Residual bequest - gift of residue amounts following all debts/taxes being paid.
- Trust - gift in a trust arrangement.
What are the 2 gift-over provisions?
- Per stirpes distribution
- Per capita distribution
What is the term for when a gift in a will no longer takes place due to the property no longer existing?
Ademption, the gift is adeemed.
What is the term for when there is not enough value in an estate to meet specific or general bequests?
Abatement, the gift would be abated (reduced)
What is a hotchpot clause?
Addresses the possibility that an executor has decided to make some gift prior to death and that the property is no longer in the estate.
What is exoneration?
An exoneration clause removes ambiguity from the handling of debts associated with specific assets. The clause would indicate whether the beneficiary of an asset should inherit the debt along with a property or if the estate should deal with the debt.
When would executor compensation be appropriate?
If the executor is working on a complex estate where there are many beneficiaries. May not be appropriate if the executor is the sole heir.
How are executor’s fees treated from an income tax perspective?
Generally taxable to the executor and deductible to the estate.
What is a cy-près clause?
A clause used when making testamentary charitable donations to specify what should happen if a charity no longer exists.. Allows the executor to choose a suitable replacement charity, or similar charities, to a now non-existent charity.
Why could a well-written tax plan for an estate backfire? What can be done to prevent this? What’s the downside?
If circumstances or tax rules change since the will was written, a complicated tax plan may not accomplish the desired income. Giving the executor flexibility in how and when gifts are allocated can be beneficial for that reason. However, the testator may have to sacrifice some certainty that their objectives will be met to achieve the desired outcome from a tax perspective.
What can a testator do if they own exempt market securities to ensure the assets are sold in ideal circumstances upon their death?
They can have the will indicate that the estate is allowed to own and operate the assets. It may be necessary for the executor to hire professionals to operate a business or help with the sale of certain assets.
Which types of documents (other than a will) could influence the outcome of an estate and potentially supersede a will (or vice versa)?
Buy-sell agreements, trust documents, family law agreements, insurance contracts.
What are the 3 concepts that the capacity test for writing a will are based on?
- Does the testator understand they are making a will?
- Does the testator understand that they are distributing property?
- Does the testator understand who property is being left to?
When might an education trust be beneficial?
If a parent wants to set aside funds for a child’s education to a greater extent than permitted by the RESP.
What is a spendthrift trust?
A trust established so the trustee is able to decide when and to what extent funds are distributed from the trust to the individual (often a child).
What are commercial trusts?
A beneficiary purchases units of a trust, and the trustees use those funds to invest on behalf of the investor (beneficiary), such as REITs and mutual funds.
What is a spousal trust and when might it be used?
Settlor settles a trust that would be for the benefit of their spouse during their lifetime, then for the benefit of someone else (typically children) when the spouse dies. This is often used in the case of second marriages and blended families.
What is the alternative to a testamentary trust?
An inter vivos trust, which is settled when the settlor is alive.
What is an alternative to leaving assets in a will that can help avoid probate?
Settling an inter vivos trust while alive so the assets do not form part of the estate and are not subject to probate.
What are the 3 certainties (legal requirements) that a trust must meet in order to be a valid trust?
- Certainty of intention - must be clear that the settlor intended to create a trust (whether formal or informal).
- Certainty of subject matter - the trust must specify what property (subject matter) it deals with.
- Certainty of objects - beneficiary must be identifiable. (Consider a couple who include a trust in their wills in favour of grandchildren they do not yet have, and they die before they have grandchildren. There would be a question around who the objects of the trust are.)
Who are the 3 parties to a trust?
- Settlor - the person who creates a trust.
- Beneficiary - person who has beneficial ownership of the trust assets.
- Trustee - the party who exercises legal ownership, and therefore control, over the trust property.
How is trustee compensation determined if it is not defined in the trust document?
Provincial trust law generally creates a formula for compensation where none is defined in the trust document, generally around 2%-2.5% of any assets flowing into the trust and the same amount for distributions from the trust.
How does the flow-through structure of a trust work?
Income generated by the trust retains it character when passed on to the beneficiaries. However, losses generally cannot be flowed out of a trust to a beneficiary, but can be used by the trust itself if it has capital gains.
What qualifies a trust to be a Personal Trust?
Essentially means the beneficiary did not pay to become a beneficiary, such as the case with a commercial trust.