Funding The Testamentary Trust

“When assets are jointly titled, they do not pass through the testator’s estate.”

See also TAX TIP 09-024, “Testamentary Planning.”

A common trap or impediment in implementing an effective “income-splitting” testamentary trust can occur when there are insufficient or no estate assets to fund the trust. This might happen, for example, where spouses (includes common-law partners) decide to own all assets on a jointly-titled basis. Ownership of assets is often structured in this manner to avoid probate fees or to provide for the transfer of ownership as a right of survivorship. However, structuring ownership in this manner can defeat the objective of creating a testamentary trust for “income-splitting” purposes. When assets are jointly titled, they do not pass through the testator’s estate. They simply become assets of the other title holder.

Consequently, there would be no estate assets to fund the trust. That is to say, a testator may have provided for the creation of a testamentary spouse trust on death, but have no estate assets available to be inserted into such trust. The testator’s income-splitting objectives would therefore be defeated.

Care should be exercised to ensure that each spouse has assets titled in their own name, so that on passing, the assets will fall under the administration of the estate and become available to fund the testamentary trust for the surviving spouse.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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