3/1/2017. Common Complexities: There s No Such Thing As A Simple Estate. Agenda. Working with Clients. February 15, 2017

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1 Common Complexities: There s No Such Thing As A Simple Estate February 15, 2017 Rachel L. Blumenfeld, LLB, TEP Partner, Aird & Berlis LLP Paul W. Taylor, LLB, TEP Associate, Borden Ladner Gervais LLP Society of Trust and Estate Practitioners (Canada) Page 1 Agenda Working with clients Planning issues arising from varying cultural and religious backgrounds Break Planning for beneficiaries with disabilities Society of Trust and Estate Practitioners (Canada) Page 2 Working with Clients Society of Trust and Estate Practitioners (Canada) Page 3 1

2 Working With Clients 1. How do you (and do you) bring up questions of culture, religion, and values? Society of Trust and Estate Practitioners (Canada) Page 4 Working With Clients 2. How do culture, religion, and values affect the manner in which you interact with clients? a) From your own background? b) From other backgrounds? Society of Trust and Estate Practitioners (Canada) Page 5 Working With Clients 3. Some cultural and religious communities are small and tight-knit, and advisors are often close friends and family members: a) How do you deal with conflicting advice from one of these advisors with closer ties to the client than you? b) What do you do if you are the close friend or family member? Society of Trust and Estate Practitioners (Canada) Page 6 2

3 Working With Clients 4. How do you deal with issues that can arise based on culture, religion, or values, such as gender/age assumptions? Society of Trust and Estate Practitioners (Canada) Page 7 Working With Clients 5. What do you do where a client s primary language is not a language in which you are fluent? Society of Trust and Estate Practitioners (Canada) Page 8 Working With Clients 6. Other tips: a) Be cognizant of distinctions between groups within a religion or culture they are not homogeneous and even various sects of a religion tend to have divisions. b) Don t make assumptions based on appearance, nationality, religion, etc. c) While the lawyer s role is to provide advice and implement instructions, it is not to enforce norms or requirements of a religious or cultural group. Society of Trust and Estate Practitioners (Canada) Page 9 3

4 Planning Issues Society of Trust and Estate Practitioners (Canada) Page 10 Planning Issues 1. How do you deal with tensions that can appear between cultural or religious practices and common law normative assumptions: a) Tax consequences of transfers to children rather than spouse; i. Ways to mitigate this:» Allocation of assets if spouse receiving some items» Spousal trust (not always appropriate)» Insurance Society of Trust and Estate Practitioners (Canada) Page 11 Planning Issues b) FLA and Dependents Relief where spouse is not benefitted or child is given a reduced portion; Society of Trust and Estate Practitioners (Canada) Page 12 4

5 Planning Issues c) Appointment of an Estate Trustee who may not otherwise be the appropriate individual; Society of Trust and Estate Practitioners (Canada) Page 13 Planning Issues d) Investment powers where religious or cultural practices constrain or eliminate the right to receive interest; Society of Trust and Estate Practitioners (Canada) Page 14 Planning Issues 2. What items are more likely to pop up when working with a client from a minority group? a) Property in other jurisdictions; b) Non-traditional investments. Society of Trust and Estate Practitioners (Canada) Page 15 5

6 Planning Issues 3. What resources are available in respect of certain cultural and religious groups: Dr. Abid Hussain, The Islamic Law of Wills and Inheritance (Huddersfied UK: Wrentham Consultancy UK, 2015). - Rachel Blumenfeld, The Jewish Laws of Inheritance and Estate Planning in Canada, (Paper presented to the STEP Canada Conference, Toronto, 2016). Society of Trust and Estate Practitioners (Canada) Page 16 Planning for Beneficiaries with Disabilities Society of Trust and Estate Practitioners (Canada) Page 17 Topics Asking the Right Questions The DTC Registered Disability Savings Plans Qualified Disability Trusts Ontario Disability Supports Program Henson and Inheritance Trusts Preferred Beneficiary Election Rollover of RRSPs and RRIFs Society of Trust and Estate Practitioners (Canada) Page 18 6

7 Ask the Right Questions Start the discussion early since it takes time for clients to confide You need full information to help the family plan properly Who has the impairment? Client? Client s child? Client s parent? Learn about the impairment, how it impacts the family and the family member Is the impairment physical, mental or a combination? What is the progression? Is mental capacity diminished now? Expectations for the future? Where there is significant disability, risk of progression or mental incapacity, the need for planning becomes more urgent Society of Trust and Estate Practitioners (Canada) Page 19 Ask the Right Questions What non disability issues are important to the affected person Sports, Travel, Hobbies, Employment, Volunteering, Public Speaking, Dancing, Support groups What are the caregiving, assistive devices and medical needs? Who are the family caregivers now and is this sustainable or fair? Society of Trust and Estate Practitioners (Canada) Page 20 Ask the Right Questions Who currently makes decisions for a mentally incapacitated person? Who will make decisions for a mentally incapacitated person? Who should the alternates be? Is there a concern about financial abuse? Is/will there be enough money to fund a inter-vivos/ testamentary trust? Society of Trust and Estate Practitioners (Canada) Page 21 7

8 Ask the Right Questions What are the significant financial costs arising from the disability or infirmity: Medicines, Transportation, Medical Treatment, Caregivers, Schooling, Assisted Living, etc Is provincial support such as ODSP important and why (income, medical coverage, assistive devices) Is there any disability or health insurance in place? Society of Trust and Estate Practitioners (Canada) Page 22 Ask the Right Questions What is a fair way to distribute assets (e.g. family business, liquid assets, family home etc ) Choice of executors/trustee Is a guardian required? Have other family members made provisions for the person? Make sure other family members estate planning does not prejudice ODSP entitlement or QDT Is anyone in the family a U.S. Person? Society of Trust and Estate Practitioners (Canada) Page 23 Disability Tax Credit DTC Society of Trust and Estate Practitioners (Canada) Page 24 8

9 The DTC Prolonged Impairment: in physical or mental functions.12 months or more; Severe is the person: Blind, or Receiving life sustaining therapy; or Markedly restricted in one Activity of Daily Living; or Significantly restricted in >1 ADL = cumulative marked restriction Society of Trust and Estate Practitioners (Canada) Page 25 The DTC Taxpayer and qualified medical practitioner (1) completed Form 2201; and Been approved by CRA There are many benefits from DTC eligibility in addition to the annual non-refundable tax credit Required in order to be eligible for, e.g., RDSP (1) Not restricted to medical doctors Society of Trust and Estate Practitioners (Canada) Page 26 Federal Tax Benefits if Eligible for DTC Non-refundable personal tax credit worth approximately $2,000 (2016) Child Disability Benefit of $2,695 (ground down to zero after about $170,000 of income) If child is under 18, additional non-refundable disability supplement worth approximately $1,000 subject to reduction for child care and attendant care expenses Can transfer unused credit to parent or spouse Society of Trust and Estate Practitioners (Canada) Page 27 9

10 Benefits if Eligible for DTC Refundable Medical Expense Supplement (income tested) Eligibility for RDSPs RDSP rollover Extended contribution period for RESP to 35 years and an extension of the duration of the plan to 40 years (must be a single beneficiary plan) Unconditional access to preferred beneficiary election Tax-free disability related employment benefits (transportation, parking, attendant ) Society of Trust and Estate Practitioners (Canada) Page 28 Other Benefits if Eligible for DTC Use of RRSP funds to purchase a home under the Home Buyer s Plan (HBP) even if it is not your first home; Can use the HBP for a related person who is eligible for the DTC (ss146.01(1)) Enhanced Tuition Credit and Education Amounts (ss118.6(3)) $11,000 Child Care Expense per child eligible for the disability tax credit (ss 63(3))- Normally 8K and 5K The ability to claim a child as a dependent even if they are over 18 The Working Income Tax Benefit disability supplement Society of Trust and Estate Practitioners (Canada) Page 29 Other Benefits if Eligible for DTC Select additional medical expenses, including Therapy under paragraph 118.2(2)(1.9) Tax free disability related employment benefits (ss 6(16)) Home Accessibility Tax Credit even if under age 65 (s ) Gas tax rebate Relief from health premiums in some provinces Society of Trust and Estate Practitioners (Canada) Page 30 10

11 Infirm But No DTC Preferred Beneficiary Election if 18 years old or over Dependent due to physical or mental infirmity, and have income equal or below the basic personal tax credit amount Rollover of RRSP and RRIF on death of supporting person Lifetime Benefit Trust Training Courses Exempt Foreign Trust Disability Supports Deduction Federal and Provincial Gas Tax Refunds (Fed Form XE8) Society of Trust and Estate Practitioners (Canada) Page 31 Registered Disability Savings Plans RDSPs Society of Trust and Estate Practitioners (Canada) Page 32 How an RDSP works Beneficiary must be eligible for Disability Tax Credit Contributions up to $200,000 until beneficiary turns 59 No deduction for contributions Earnings accrue on tax-deferred basis While beneficiary is under 50 contributions can attract Canada Disability Saving Grants and/or Bonds. NOT JUST FOR LOW INCOME SITUATIONS References: ITA 146.4(1) disability savings plan ; 146.4(4)(g), 146.4(5) Society of Trust and Estate Practitioners (Canada) Page 33 11

12 Registered Disability Savings Plan Contributions not tax deductible and taxed when withdrawn. Investment income, grants and bonds are taxable when withdrawn. Payments from an RDSP (subject to a maximum annual limit, determined by reference to the life expectancy of the beneficiary and the fair market value of the plan property) are required to commence by the end of the year in which the beneficiary attains 60 years. Only the RDSP beneficiary or the beneficiary's legal representative are permitted to receive payments from the RDSP. Contributors are not entitled to receive a refund of contributions. Society of Trust and Estate Practitioners (Canada) Page 34 Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) * Assumes family income is < $90,563 for CDSGs and is < $26,364 for CDSBs (2016 thresholds). Society of Trust and Estate Practitioners (Canada) Page 35 Making catch up contributions CDSG and CDSB: Entitlements retroactive 10 years, starting in 2008 Based on family income per year of entitlement CDSG: Maximum CDSG in one year is $10,500 3 years ($3,500/year X 3) Higher rates paid first Society of Trust and Estate Practitioners (Canada) Page 36 12

13 Withdrawals Shortened Life Expectancy Can withdraw up to $10,000 of taxable plan savings and prorated contributions without having to repay any grants or bonds received in the RDSP in the preceding ten years Must submit an election to be a SDSP with the RDSP issuer and issuer must inform Minister of Human Resources and Skills Development of the election Society of Trust and Estate Practitioners (Canada) Page 37 Account Holder The RDSP beneficiary if mentally capable Otherwise a qualifying family member or guardian legally authorised to act for the beneficiary 2012 Federal Budget: When, in the opinion of an RDSP issuer, an individual s ability to enter into a contract is in doubt Spouse, common-law partner, or parent of an individual will be a qualifying family member who may open an RDSP for the individual Temporary measure to end of 2016 Qualifying family member may continue to be the plan holder after Federal Budget - These measures were extended to end of 2018 Society of Trust and Estate Practitioners (Canada) Page 38 RDSP FAQs Investment income earned in an RESP can be transferred to an RDSP in certain circumstances. RDSP must be terminated by the end of the year following the year in which the beneficiary ceases to be eligible for the DTC Exception for individuals who are temporarily DTC-ineligible RDSP not collapsed if loss of DTC eligibility is for five years or less and valid election filed. Society of Trust and Estate Practitioners (Canada) Page 39 13

14 If a beneficiary ceases to be DTC-eligible In any year the beneficiary is not DTC-eligible: Contributions: Not allowed Includes transfers of RESP income Exception: Permitted rollovers from an RRSP or RRIF still allowed CDSGs and CDSBs: No payments or entitlements Withdrawals: Subject to the proportional repayment rule Minimum and maximum withdrawal rules apply References: ITA 146.4(1) contribution ; 146.4(4)(f) Society of Trust and Estate Practitioners (Canada) Page 40 When the RDSP beneficiary dies RDSP must be closed by the end of the following calendar year CDSGs and CDSBs received within the last 10 years must be repaid RDSP assets form part of the beneficiary s estate, distributed in accordance with beneficiary s Will or intestacy rules Original contributions not taxable Income taxed in beneficiary s estate Grants and bonds paid in prior 10 years refunded Society of Trust and Estate Practitioners (Canada) Page 41 RDSP vs. family trust Advantages: CDSGs & CDSBs may add $90,000 + growth to RDSP Tax-free growth Possible tax-free income for low-income beneficiary Set up & maintenance costs may be lower Disadvantages: Only one beneficiary (or beneficiary s estate) can obtain funds Rules limit contributions and distributions Society of Trust and Estate Practitioners (Canada) Page 42 14

15 Qualifying Disability Trust (QDT) Society of Trust and Estate Practitioners (Canada) Page 43 QDTs Requirements At end of year the trust must be a testamentary trust that arose on and as a consequence of death. Accordingly, an inter vivos trust may not be a QDT and an insurance trust may be a QDT. The trust must be resident in Canada for the entire year (not just at the end of the year). Society of Trust and Estate Practitioners (Canada) Page 44 QDTs Requirements (cont.) In the trust s tax return for the year, the trust has elected jointly with electing beneficiary to be the QDT and included the SIN of the electing beneficiary. There is no relief for a late election. If incapable, the electing beneficiary may need a court appointed guardian to be able to make the election. [see Income Tax Act ( ITA ) s. 122] Society of Trust and Estate Practitioners (Canada) Page 45 15

16 QDTs Electing Beneficiary The electing beneficiary must qualify for the Disability Tax Credit under s Note that there may be other (non-dtc-eligible) beneficiaries included in the trust The electing beneficiary may not make a QDT election in respect of any other trust in that year. Accordingly, there can only be one QDT per disabled beneficiary in a given year. [ITA s. 122(3)] Society of Trust and Estate Practitioners (Canada) Page 46 QDTs Principal Residence October 3 Notice of Ways and Means Motion: Residences owned by trusts will not be eligible for the principal residence exemption unless the trust is: Alter ego and certain similar trusts A QDT where the beneficiary is the child or current or former spouse or common-law partner of the testator; or Trusts for certain minors The beneficiary residing in the residence must be resident in Canada for each tax year at issue. A filing must be made upon the sale of the residence. Society of Trust and Estate Practitioners (Canada) Page 47 QDTs Recovery of Tax The trust income is subject to graduated rates for any year it elects to be a QDT, but it is subject to pay a recovery of tax in respect of previous year if: None of the beneficiaries of the trust at the end of such year were the electing beneficiary for a preceding year, The trust ceased to be resident in Canada, or A capital distribution is made to a beneficiary other than the electing beneficiary. [see ITA para. 122(1)(c) & subs.122(2)] Society of Trust and Estate Practitioners (Canada) Page 48 16

17 QDTs Recovery of Tax (cont.) Amount of recovery tax: The amount of tax that would have been paid in a previous year if the trust had been subject to highest marginal rate and taxable income for that year excluded amounts that were subsequently distributed as capital to electing beneficiary. The intent is to claw back tax savings for income taxed at graduated rates which was subsequently distributed as capital to non-electing beneficiary. Society of Trust and Estate Practitioners (Canada) Page 49 Ontario Disability Support Plan (ODSP) Society of Trust and Estate Practitioners (Canada) Page 50 ODSP Means Tested (Assets and Income) Can provide: Income support Drug, dental, vision care coverage Hearing aids Diabetic supplies Transportation to medical appointments Wheelchair/mobility device repairs and batteries Subsidized Housing Society of Trust and Estate Practitioners (Canada) Page 51 17

18 ODSP General Non-exempt assets generally means assets such as a principal residence, motor vehicle (generally adapted to the disability), other disability related items, and RDSPs. This is a general summary and the applicable support guidelines should be consulted. Society of Trust and Estate Practitioners (Canada) Page 52 Ontario Disability Support Program May not have more than $5,000 (plus $2,500 for a spouse or common-law partner and $500 for each dependent) in nonexempt assets. May have up to $100,000 in a non-discretionary trust or an unlimited amount in a discretionary trust (i.e. Henson Trust ). May not have more than $6,000 per year in non-exempt income (for example, income from RDSPs is exempt). Distributions from a Henson Trust are included in income unless they are for disability related expenses. Society of Trust and Estate Practitioners (Canada) Page 53 Henson Trusts A Henson Trust is a fully discretionary trust (created in a Will or during life) that is generally used to ensure that disabled beneficiaries remain eligible for government income support. The beneficiary has no control over the assets in the trust. Not all QDTs are Henson Trusts and not all Henson Trusts are QDTs, although a Henson-style Trust established in a Will can make a QDT election and so qualify. Society of Trust and Estate Practitioners (Canada) Page 54 18

19 Henson Trusts and LBTs A Lifetime Benefit Trust (for RRSP or RRIF rollover) may be structured as a Henson Trust But beware of Ontario s Accumulations Act requires that all income in a trust be paid out in each year after the 21 st anniversary of the trust generally a Henson Trust in Ontario has alternate beneficiaries who may receive such payments, which would not be allowed under the LBT rules Society of Trust and Estate Practitioners (Canada) Page 55 Henson Trusts A broad discretionary trust need not require that the Trustees maintain a beneficiary s eligibility for provincial disability support if it would be to the benefit of the beneficiaries to be supported by the trust (and other assets) instead. Often the desire to retain provincial support is due to benefits other than the income support, such as drug coverage, group home or other living arrangements, support services. Consider whether the provincial support is necessary or there are alternate means to obtain those items (for example, in Ontario the Trillium Drug Program). Society of Trust and Estate Practitioners (Canada) Page 56 Preferred Beneficiary Election (PBE) Society of Trust and Estate Practitioners (Canada) Page 57 19

20 Preferred Beneficiary Election Generally, income of a trust is either taxed in the trust or allocated to one or more beneficiaries who have received the income. The Preferred Beneficiary Election ( PBE ) allows income to be taxed in the hands of a Preferred Beneficiary without requiring the payment to be made to him or her. Society of Trust and Estate Practitioners (Canada) Page 58 Preferred Beneficiary Election (cont.) A PBE may be made through an inter vivos or testamentary trust. Income allocated to a preferred beneficiary forms part of the amount deductible to the trust and is taxed in the hands of the preferred beneficiary as though it had been received by him or her. Society of Trust and Estate Practitioners (Canada) Page 59 Preferred Beneficiary Election (cont.) If the amount that is the subject of the PBE is not actually paid or made payable to the beneficiary from the Trust, the allocation of income to the beneficiary may not constitute income for the purposes of provincial disability payments ODSP Income Support Directives refer to income received and does not include a deeming provision). [see ITA s. 104(14)] Society of Trust and Estate Practitioners (Canada) Page 60 20

21 Preferred Beneficiary Election (cont.) The preferred beneficiary must be either: i. eligible for the disability tax credit under subsection 118.3(1) of the Income Tax Act (Canada) ( ITA ) or ii. 18 years old or over, dependent on another due to physical or mental infirmity, and not have an income that exceeds the amount eligible for the basic personal tax credit under paragraph 118(1)(c) of the ITA. Society of Trust and Estate Practitioners (Canada) Page 61 Preferred Beneficiary Election (cont.) The settlor of the Trust must be either: i. the preferred beneficiary, ii. the current or former spouse or common-law partner of the preferred beneficiary, iii. a child, grandchild, great grandchild of the settlor or a the spouse or common-law partner of the child, grandchild or great grandchild Society of Trust and Estate Practitioners (Canada) Page 62 Preferred Beneficiary Election (cont.) Additional issues include: Potential attribution issues where the settlor is a beneficiary or trustee of the trust. Treatment of the trust s assets as the beneficiary s assets for the purposes of provincial disability support payments if the beneficiary is the settlor of the trust. Society of Trust and Estate Practitioners (Canada) Page 63 21

22 Preferred Beneficiary Election (cont.) An election must be made by written statement (there is no form) containing: the calculation of the amount of the preferred beneficiary s share of the accumulating income; the preferred beneficiary s social insurance number and relationship to the settlor of the trust; whether the disability amount will be claimed by the preferred beneficiary, a supporting individual of the preferred beneficiary (if so, the name, address, and social insurance number of the supporting individual should be provided), or another individual who is eligible to do so. Society of Trust and Estate Practitioners (Canada) Page 64 Rollovers Society of Trust and Estate Practitioners (Canada) Page 65 Transfer of RESP income to an RDSP Plans must share a common beneficiary; RESP must allow accumulated income payments; and Either: beneficiary has severe & prolonged mental impairment that can reasonably be expected to prevent pursuing post-secondary education; RESP has been in existence for at least 10 years, and each of the RESP beneficiaries is at least 21 years of age & not pursuing post-secondary education; or the RESP has been in existence for more than 35 years References: ITA 146.1(1.1), 146.1(1.2) Society of Trust and Estate Practitioners (Canada) Page 66 22

23 RESP income transferred to an RDSP Must meet criteria for a contribution: Cannot exceed, and will reduce, RDSP contribution room Up to age 59 / $200,000 lifetime limit No CDSGs No rollover if RDSP beneficiary is deceased RESP income will be included in taxable RDSP withdrawals CESGs and CLBs must be repaid RESP must be terminated by the end of February in following year References: ITA 146.1(7.1) Society of Trust and Estate Practitioners (Canada) Page 67 Transferring inherited RRSP/RRIF assets to an RDSP RRSP/RRIF proceeds from a deceased (grand)parent may be rolled over on a tax deferred basis to the RDSP of a (grand)child Up to $200,000 less RDSP contributions already made No CDSG or CDSB entitlement on transferred amounts (Grand)child must have been financially dependent on the (grand)parent because of physical or mental infirmity (Grand)parent must have named (grand)child as beneficiary under will or in RRSP/RRIF documents Election required Transfer must occur by 60 days after year of death of (grand)parent References: ITA 60.02; 146.4(1) contribution Society of Trust and Estate Practitioners (Canada) Page 68 Other Planning Ideas Create QDT for high income beneficiary Income splitting with a dependant parent; Donation of residual interest in a family home; Ownership of home for a dependent via an inter-vivos trust. TFSAs Pool resources with others for significant shared items (eg private group home, medical equipment, adaptive technology) Consider that landlords can deduct accessibility modifications to rental properties when renting a property Health and Welfare Trusts? Society of Trust and Estate Practitioners (Canada) Page 69 23

24 Questions & Answers Society of Trust and Estate Practitioners (Canada) Page 70 24