Saturday, November 26, 2005

Spousal Trusts: Balancing the Interests of Your Spouse and Children

If you are married or living in a marriage like relationship and have children from a previous marriage, you may find it a challenge to make provisions in your estate plan for both your spouse and children. You will likely want to make sure that your spouse's needs are looked after if you die before first, but that eventually your children will also inherit some of your wealth.

One method of balancing the interests of your spouse and children is by setting up a trust in your will. You can provide in your will that some or all of your assets will be held by someone you appoint as a trustee for your spouse’s benefit during his or her lifetime. On your spouse’s death, the trustee would then distribute the remaining trust assets to your children. The trustee would be given legal title and control of your assets on your death under your will, but would be required to deal with the assets in accordance with the directions you have set out in your will.

You can set out the terms of the trust in your will according to the needs of your spouse and children. For example, you might provide that all of the income from any investments held by your trustee will go to your spouse. You may also set a minimum amount for your trustee to pay your spouse monthly in case the investments do not generate enough income to adequately provide for your spouse. The minimum payments could be adjusted annually in accordance with the cost of living index.

It is usually a good idea to give your trustee the power to give your spouse additional funds out of the trust assets as your trustee considers appropriate to meet any needs that may arise in the future.

If your spouse has other income, there may be some tax advantages to setting up a spousal trust in your will, rather than leaving the assets to your spouse outright. The trust is treated as a separate taxpayer, and the trustee may elect to pay the taxes on the income earned on the trust assets. Because income tax rates are graduated so that many taxpayers have to pay a higher portion of their income to Canada Revenue Agency if their income increases, the amount of tax paid by the trustee on the investment income if it is taxed in the trust may be lower than if the same amount of investment income were taxed in your spouse’s hands.

It should be noted that different tax rules apply if you set up trust that takes effect before your death.

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