If you set up a trust as part of your estate plan, one date you
don't want to forget is the 21st anniversary of the trust. This
is because in most cases, a trust is deemed to dispose of its
assets for fair market value on the 21st anniversary of the
creation of the trust, and every 21 years thereafter (there are
some modifications to the rule for certain trusts such as spousal
trusts, alter-ego trusts and joint partner trusts). If the 21st
anniversary of the trust passes without proper planning, the trust
may have a significant tax liability with respect to assets that
have increased in value in the 21 year period. There are ways to
reduce the impact of this deeming rule, but the appropriate
strategy will depend on a number of factors, including:
Nature of trust property. The impact of the
deemed disposition rule will depend on the nature of the property
held in the trust. Not all assets are subject to the deemed
disposition rule, and some assets (for example, shares of a private
company) may require more complex planning.
Value of Assets. If the assets subject to the
deemed disposition rule have little value, or have not
significantly increased in value since they were purchased, the tax
consequences of the deemed disposition will be minimal.
Beneficiaries of the Trust. In some cases, it
may be possible to avoid the deemed disposition by distributing
trust assets to beneficiaries prior to the 21st anniversary.
Subject to some exceptions, this can be done on a tax-deferred
basis if the beneficiaries are resident in Canada. In cases where
it's not appropriate to distribute assets to beneficiaries (due
to their age, health, or other reasons), or if all beneficiaries
are living outside of Canada, planning around the deemed
disposition rule may be more challenging.
Purpose of the Trust. If the trust was created
for a purpose that is no longer relevant, it may make sense to
avoid the deemed disposition rule by distributing the trust
property and terminating the trust prior to the 21st anniversary.
In other cases, a distribution of trust property or termination of
the trust may be inconsistent with estate planning objectives.
Terms of the Trust. Some trust deeds may not
be flexible enough to accommodate the required planning. In these
situations, it may be necessary to consider amending or varying the
terms of the trust in addition to any planning that is done in
connection with the deemed disposition rule. There are various ways
to effect a variation depending on the circumstances, some of which
require a court application. Any tax consequences of the variation
itself must also be considered.
It's important to begin planning well in advance of the
trust's 21st anniversary as it may take time to implement the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On March 31, 2014, BC's new Wills, Estates and Succession Act1 ("WESA") will come into force. WESA introduces new protections for beneficiaries of estates that are in danger of being disputed or deemed ineffective by a court.
It is not uncommon for parents to provide monetary gifts to their adult children. Parents may wish to help their child with a down payment on a property, or help pay out their child's existing mortgage.
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