Whatever their area of practice, at some point many lawyers find themselves in a situation where they are tempted, or even required, to "dabble" in an estate matter. This often involves representing an estate trustee without fully understanding the challenges and pitfalls that lurk in such a role. With the increasing prevalence of ongoing testamentary trusts and trusts created by individuals during their lifetimes to facilitate tax objectives, representing or acting as a trustee is a serious responsibility, not to be taken lightly.
Careful adherence to the terms of the trust and to all tax compliance and legal requirements is necessary, while simultaneously maintaining attentiveness to beneficiary needs and personal sensitivities. There may be numerous trusts to administer in one family unit, adding to the complexity.
Here are some other important issues to consider:
Bank accounts and Records
The CRA or a beneficiary may request detailed records of each trust’s financial transactions. Trustees should establish a bank account for each distinct trust and keep records of all revenues and expenses (including receipts) to assist with this accounting. It may also be useful to obtain a credit card for each trust.
Loans
Where a trust is expected to make loans or guarantees in favour of beneficiaries, consider carefully the financial and legal ramifications. Do the trust provisions sufficiently authorize such loans? A spousal trust might be "tainted" by a loan made to someone other than the spouse and might lose its “spousal” designation, triggering unintended capital gains.
Borrowing money from non-arm’s length persons
A testamentary trust can lose special tax benefits by borrowing money or receiving a loan guarantee from a non-arm’s length person. As an exception, when a testamentary trust borrows money from, and then reimburses, a beneficiary for trust obligations (e.g. funeral expenses, taxes), the testamentary status may be maintained in certain specific circumstances. Trustees and lawyers must be aware of these circumstances.
Yearly consultations
Extra care is required to make proper distributions to achieve optimal tax savings prior to the year-end. Trustees are required to make irrevocable decisions at this time. Although specific amounts may not yet be known, a clear scheme or formula of distribution ought to be determined. Proper documentation of trustee resolutions and an acknowledgement by the beneficiaries before year-end is advisable.
Tax returns
The trust is required to file a tax return in Canada on an annual basis within 90 days of its year end. There may be severe penalties for late filing that are often to be paid by the trustee personally.
Distributions and clearance certificates
The tax consequences of distributing any sum should take into account the personal tax situation of those receiving the funds. Further, trustees are responsible for unpaid personal taxes of the deceased to the extent of the trust property. They are also responsible for unpaid trust income taxes, and should obtain a clearance certificate from the CRA, or make an appropriate holdback, prior to a material distribution.
Foreign beneficiaries
There are tax issues – and sometimes serious negative consequences – for foreign beneficiaries who receive trust distributions. The U.S. has complex “throwback rules” that penalize the accumulation of income in a foreign trust. Canadian rules may require that trustees obtain additional clearances because a distribution from a Canadian trust is a disposition by the beneficiary of capital property, namely the capital interest in the trust.
Trustee's residence
Changing the trustee's residence to a Country other than Canada may affect the residence of the trust, triggering deemed dispositions of many trust assets and leading to other unintended consequences.
The world of estates law can be dangerous territory for the unwary lawyer. As always, tread carefully, know your surroundings, and seek appropriate help from financial and accounting professionals, and other experienced counsel, when necessary.
Guy Desmarais, B. Com., LL. B. TEP. Guy is a partner in Collins Barrow's Sudbury-Nipissing member firm. He can be reached at gudesmarais@collinsbarrow.com, or by telephone at 705-560-2056.