On death, RRSPs and RRIFs belonging to the deceased are deemed to have been included in the deceased income immediately before death and are taxed on their full market value as of the date of death.
Created by s. 60.011 of the Income Tax Act, a Lifetime Benefit Trust ("LBT") allows the rollover of an RRSP or RRIF on a tax-deferred basis to a beneficiary who is the child or grandchild of the deceased who has a disability due to a mental infirmity and who was financially dependent on the deceased at the time of death. The LBT is set up in the deceased's Will and directs the estate trustees to purchase a qualifying trust annuity using the funds in the RRSP or RRIF. The annuity payments are paid to the LBT, to be directed according to its terms, rather than to the beneficiary directly.
To qualify as an LTB, the following factors must be met:
- Disability due to a mental infirmity
- The disability caused the beneficiary to be financially dependent on the deceased
- A qualifying trust annuity is purchased
- The person with the disability is the only beneficiary entitled to receive the income or capital of the trust during the beneficiary's lifetime
- In making payments from the trust, the trustees must consider the needs of the beneficiary, including their comfort, care and maintenance.
The beneficiary of the LBT is not required to have a Disability Tax Credit, although this can be evidence in support of a mental infirmity. Further, only disabilities resulting from a mental infirmity which causes the child or grandchild to be financially dependent on the deceased will qualify; an LBT cannot be set up for those with disabilities due to a physical impairment.
Financial dependence on the deceased is determined by looking at all the facts of the relationship, however a beneficiary with income greater than the basic personal amount is presumed not to be financially dependent.
A qualifying trust annuity is one where the annuitant is an LBT and payments are to continue for the lifetime of the beneficiary or for 90 years minus the age of the beneficiary at the time the annuity is purchased.
The terms of the trust must provide that the person with the disability is the only beneficiary entitled to receive the income or capital of the trust during the beneficiary's lifetime, and that in making payments to the beneficiary the trustees must consider the needs of the beneficiary including their comfort, care and maintenance. The other terms of the trust can either provide that the payments from the trust are in the absolute discretion of the trustees, or can create a set payment schedule. The trustees may accumulate the income generated back into the capital of the trust for a period of 21 years under the Accumulations Actafter which point they must pay out the income to the beneficiary. Regardless of whether the income is actually paid to the beneficiary or not, it is deemed to be income to the beneficiary and is taxed at the beneficiary's marginal rate.
When considering whether to use an LBT as a planning tool, it is important to consider whether the beneficiary is, or is expected to be, receiving Ontario Disability Support Payments (ODSP). Unlike a Henson Trust, which is commonly used to hold assets for a disabled beneficiary and is not considered to be an asset for the purpose of determining ODSP entitlement, the features of an LBT may impact on the beneficiary's entitlement to ODSP. Since a trust cannot accumulate income after 21 years, and the disabled person is the only allowable beneficiary, if the income after 21 years exceeds what the beneficiary is allowed to receive under the ODSP regime, then their entitlement to ODSP is at risk.
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.
