Tax Friendly Preservation of Family Assets

By Gary Kirk of Kirk Montoute Dawson LLP posted in Estate Law on Friday, September 6, 2013.

Our Family and Estate Law clients who approach us looking for a way to preserve assets through a Pre-nuptial Agreement – particularly those who have a high net worth – will often generate a complimentary Estate Plan  that makes appropriate provision for their spouse and children through their Will. A pre-nuptial Agreement dealing with one’s assets mitigates the negative consequences of a separation or divorce during one’s life. A wisely drafted Will can provide similar benefits to one’s Estate after death.

The case of Tataryn v. Tataryn Estatefrom the Supreme Court of Canada, confirms the obligation to ensure our Estate Plans – generally expressed through our Wills – make adequate provision for those to whom we have a legal or moral obligation. The most obvious examples of those to whom we have this obligation are dependent children and surviving spouses (including spouses from non-married relationships). In cases where an individual wants to ensure a second (or third) spouse is adequately provided for but that one’s children from an earlier relationship also receive maximum benefit, creation of a “Spouse Trust” in a Will is an excellent way to accomplish both goals and delay invoking a taxable capital gain with respect to the assets held in the trust, until the surviving spouse disposes of those assets or becomes deceased.

The Income Tax Act (Canada) allows a testator to place assets into a trust for the benefit of a surviving spouse. The terms of the trust must be carefully worded to ensure the surviving spouse is the only beneficiary of the income or capital of the trust for the rest of his or her life. Here’s the best part. Normally, all capital assets are deemed to be disposed of at fair market value in the year of death. This often creates a significant capital gain tax liability; however, taxation of capital assets placed into a spouse trust is delayed until those assets are actually disposed of – either during the life of the surviving spouse or upon his or her death. This allows the assets in the trust to continue to grow in value without being depleted or liquidated to meet a tax liability. When the surviving spouse becomes deceased and the Spouse Trust comes to an end, the testator’s children can receive the assets. This achieves the goal of meeting the legal and moral obligation to make adequate provision for both a surviving spouse and one’s children.

Contact Gary Kirk of Kirk Montoute Dawson LLP for more advice on Pre-nuptial Agreements and Estate Plans.

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