Usually when you are thinking about what to include in your will, your thoughts tend to focus on who gets what and who will take care of my kids. It's also possible that one would tend to worry about ensuring there is enough left over for your family members once the taxman gets his piece of the pie. If so, then maybe you should also think about how to keep that piece of pie as small as possible by properly planning your will in a tax- efficient manner.
The Spousal Gift
As you all know, the Canadian tax rules provide that when you pass away, you are deemed to have sold all of your assets immediately prior to your death. To the extent that any of your assets have a pregnant gain, then your estate will be subject to capital gains tax. On the bright side of things, at least your beneficiaries get to inherit your assets with a bumped-up cost base. There is, however, one important exception to this deemed capital gain. You can defer your death tax exposure by making your spouse the beneficiary of your estate, or perhaps better still, you can leave your assets in a qualifying spousal trust. There is no election that your estate need make; it's an automatic deferral to the extent you leave assets to your spouse or a spousal trust.
Specifically, the tax rules provide that bequests to a spousal trust (or to your spouse outright) will not trigger capital gains tax on your death, so that assets transferred to the spousal trust will occur on a tax-deferred basis.
A Bonus
The bonus of a spousal trust is that you can choose trustees to protect the surviving spouse against poor financial decisions.
As well, you can ensure that the surviving spouse will not be able to transfer assets to undesired beneficiaries (for example, if he or she were to get remarried and decide to leave your assets to their new spouse). But you must be certain that the spousal trust qualifies for the tax-deferred treatment; otherwise, no tax-deferred rollover upon your death will be available. Specifically, the spousal trust must meet the following requirements:
The spouse is entitled to receive all of the income of the trust while he or she is alive. No other person (including kids) may receive or otherwise obtain the use of any income or capital of the trust. Note: just because no one else is allowed to receive the capital of the trust does not mean that the spouse is automatically entitled to the capital. Which means you can provide that there is no power to encroach on capital so that the nest egg stays safe for your children, and your spouse gets the benefit of the income during their lifetime.
In other words, as long as no other person received or obtains the use of the capital, the spousal trust will not be disqualified. In order to make sure that you do not stray from these requirements, care should be taken when drafting your will and the clauses relating to the spousal trust.
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Originally published in The Tax Letter
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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