How Trusts Save You INSANE Amounts of Taxes

Chris from Equitable Life of Canada explains how trusts work in Canada and why they save taxes. A 2016 rule change means most trusts pay top marginal tax rates from dollar one, but life insurance held in trust avoids the 21-year deemed-disposition rule and grows tax-deferred. Trusts also protect assets, provide privacy, and let you move future growth to the next generation through strategies like estate freezes.
Questions this video answers
2016
21 years
36 months (the graduated rate estate is taxed at graduated rates for the first 36 months after death).
50% (capital gains inclusion rate).
$971,163 (lifetime capital gains exemption amount referenced).
Chapters
So it's a wonderful tax deferral tool and you'll see how that's done down the road. So a capital asset, shares of a private company or land or buildings, anything that's capital asset, it has a capital gain attached to it. And so that capital gain taxes paid at the capital gain rate, which is half the regular rate on the difference between the fair market value of that asset and the cost base, whatever you pay for that asset and that's taxed at the capital gain rate. So what a trust can allow us to do is defer gains to the next generation or next couple of generations down the road. And it's really used in the world of private businesses, successful private businesses where kids are coming into the business and grandkids are coming to the business. And the whole idea is how do we mitigate or fix the tax liability on generation one, but past future gains onto generation two? It's a very useful tool when you're doing that.
I'd like to introduce our speaker for tonight. Now, I've been blessed to work with Chris before and he's actually done a live event with me. And Chris is a 39 year veteran in this life insurance and financial services industry. And he's had multiple roles in his capacity over the years. As you can see, he's been a financial advisor, a trainer, a marketing consultant to independent financial advisors like myself. He's worked with us and he's currently an advanced case consultant with Equitable Life of Canada. And again, he works with us when we have questions, certain questions that we don't know the answer to. Often it's Chris that we take those questions to. And Chris comes to us from the great province of Saskatchewan and that's where he's coming to from tonight. So with that, I'm going to turn it over to Chris and let him go through his presentation on trust.
Good evening, everybody. Good evening. From Regina, Saskatchewan. It sounds like we've got people from right across the country by the sound of it. And Dana mentioned talking about trusts in a Canadian context versus an American context because the laws, the tax laws and everything are quite different as you would imagine. But even within Canada, the laws are quite different. And trusts are governed by provincial provinces. So the way trusts work in Quebec, the way trusts work in other provinces, and even within provinces is different because they're all governed by the provincial governments. And in Quebec they're really different because there's a totally different legal system altogether. So I'm not going to talk at all about Quebec. I don't speak French, Francois. Unfortunately. But I'm going to talk about the common law provinces. So I think Dan, what we're planning to do here, people have questions. We're just going to defer the questions right to the end. So I'm going to move through this presentation and I'm going to talk about trust generally and then talk about trusts in the context of using a life insurance contract because the two work really well together as you will see in a moment. But trusts are often used without insurance. So I just want everybody to understand that how they're done. What is a trust? Use of trust to own life insurance policies Issues relevant to trust only life insurance contracts. The use of trust to receive life insurance proceeds. I'm not going to talk about life insurance shares. That's the use of, of a special class of shares that would be owned by non business kids in many cases to extract wealth out of the company. And we can talk about that in the questionnaire Q and A session. You want to talk about it. But it's a, it's a very unique application of organizing your company shares and making sure that value is passed on non business kids. And then finally this is the area that I work, work most in is, is using trust and transitioning family businesses. And I want to, I want to make sure everybody understands I'm not a trust in a state lawyer. I'm not a cpa. My specialty is, is insurance. I've been in the insurance industry a long time but given my role, I work a lot with lawyers and accountants. So I'm reasonably familiar with how these things are all work together, how trusts and wills and PoAs and insurance all work together and. But I'm not the guy that write these things. The trust and estate lawyer would have to write the trust. So let's begin. What is a trust? A trust folks is not a legal entity. Which surprises people. I think, okay, that's a, it should be a legal entity, but it's not all it is, it's, it's an arrangement of ownership over property. So the question is, is who owns the property? Who's the beneficiary of the property? Who's the, who did the property come from? It's an ownership arrangement. It's not a legal entity like a partnership, like a corporation. It's just an ownership structure and it separates the ownership and beneficial rights. So what does that mean when a trust is established? I'm going to get into this in more detail in a moment. There is a legal owner of the property that's been settled into the trust. And then there's, then there's a beneficiary of the trust assets. So. So a beneficiary has no legal ownership in those assets, but they're the ultimate benefactor of the assets in the trust, which may seem like a crazy thing given that they're the ultimate beneficiaries anyway, but given that split of ownership and the separation between ownership of the assets and the, the beneficial rights gives trust a very unique advantage when it comes to protecting property. And it's a relationship. It's not a person, so of course it's not a person. It's not a living, breathing thing, but it is, it is a thing that pays tax and it's treated as an individual for tax purposes and it's a T3 return. So of course, as individuals, we all file our T1 returns. If you own a private company, you're filing a T2 return, and if you have a trust, it's a T3 return. So different tax returns for the different income. So a trust is taxed like an individual, but in most cases, and the government changed this a while back as an individual, we all operate under a graduated right system. So the more income you make, the more tax you pay. And trust used to be subject to the same sort of rules where they all had a graduated rate system and the government didn't particularly like that. So they changed the rules. I think it was 2016 they changed the rules and now trusts, and not all trusts, but most trusts are now taxed at the top marginal rate in your province, right from $1. So there's no graduated rate. And some trusts still do have graduated rates. I'll talk about that a little later on. So what a trust is not a trust, is, is not a tool you can use to avoid or evade tax. And as we know, if you evade tax, you could be heavily fined, penalized, and even go to jail if you evade tax. And that's one of the things I find interesting. Dan talked about how people are talking a lot about trust now, and that's absolutely true. I get lots of questions about trusts and where trusts are used and, and how can a trust be used to avoid tax. And, and there's no avoidance of tax here. There's no, certainly no ev of tax. A trust can't be used that way. And the comments I get most often is that people will say, well, I'm just going to use a trust, prevent myself from having to pay this tax. Well, there's no such thing. You can't do that. But, but a trust isn't. Is an excellent tax deferral tool. So it's a wonderful tax deferral tool and you'll see how that's done down the road. So my capital asset could be shares of a private company or land or buildings, anything that's capital asset, it has a capital gain attached to it. Taxes paid at the capital gain rate, which is half the regular rate on the difference between the fair market value of that asset and the cost base, whatever you pay for that asset, and that's tax the capital gain rate. So what a trust can allow us to do is defer gains to the next generation or next couple of generations down the road. And it's really used a lot in, in the world of private businesses, successful private businesses where kids are coming into the business and grandkids are coming to the business. And the whole idea is how do we mitigate or f fix the tax liability on Gen 1, Generation 1, but past future gains on to Generation 2? It's a very useful tool when you're doing that. So it's a trust, it's a relationship between these people. You've got a settler and the settler is the person who creates the trust. So the settler is the person that has the, the initial property. They've got the building or they've got the land or they've got the money. They're the ones that settle the property with the asset. The trustee is one or more persons that own the property placed in the trust. And it's a trustee that has legal title. If I establish a trust and I settle that trust with property that I own and I put that property in that trust, it's not me that owns it anymore, it's the trustee, the person that I establish as a trustee that owns that owns that property. I might even be the trustee of my own trust. And then you've got beneficiaries. The beneficiaries are the people to whom the property is ultimately being held. And that's called beneficial title. So there's a difference between legal title and beneficial title. But the property is being held for the benefit of other individuals. So trust, as I mentioned, is not a legal entity. Therefore all business of the trust is conducted in the name of the trustee. So whoever your trustee is, it's named Jane Doe, trustee for such and such a trust. So it's all every. It's as that that trustee owns owns that property. And trusts, as I mentioned, are governed by provincial law. Therefore rules vary by province. So whatever province you happen to be in if think this is something you can use personally or you're an advisor. Tonight in another province, it's important to talk to a trust and estate lawyer to understand what the laws are, what the rules are surrounding trust in your particular province. But the structure is really quite simple. We've got the person settling the trust and we've got the trust tool. And then the trustee owns the property in the trust and then you have. The beneficiaries are ultimately going to benefit from the income and the capital of the trust. There are three requirements, ladies and gentlemen, for a trust to exist. And if any one of these does not exist, the trust doesn't legally exist. There has to be certainty of intention. So the settler, the person with the property initially has to display a clear intention to create the trust, such as recording in the trust document. So in many cases a trust document would be established and the desires of the settlor in terms of the management of the property, who ultimately is going to benefit from that property in terms of income and capital. That would be all written, written into the trust. So there's got to be certainty of intention. And that trust document will certainly show that there's got to be certainty of property. We've got to have something that goes into the trust. So we might have great intentions, but if we have nothing to put into the trust, then we can't have a trust because we have no property. So that seems pretty obvious. And then we have to have certainty of beneficiaries. The beneficiaries of the trust must be clearly identified by either name or by class. And so the trust document would specify who those people are if they have different classes and so on. And you have to have beneficiaries. So if you don't have one of these things, then a trust, a formal trust, does not exist. There are various types of trusts. Dan mentioned at the outset that there's all kinds of different trusts and he's absolutely right. The Government of Canada CRA website, you query trusts and you'll see that there's two types of trust they talk about. One is called an interviews trust. And, and those are our trusts that you establish when you're alive. So you establish this trust, you're moving assets into it when you're alive, you're creating beneficiaries in your Life. And there's 30 different types of interviews trusts and then there's testamentary trusts, testimony trusts are created when you die. And there's, there's a number of types, just four types, not nearly as many testament testimony trusts. But the, the graduated rate of state is, is a trust. So when, when you die, your state receives your assets and your, your state would be designated a graduated rate of state. So it's a trust. So it's taxed differently than regular trusts and it's taxed at the graduated rate like you are as an individual. It's taxed at the graduated rate for 36 months after death. So that's a big advantage of the graduated rate of state or the, the estate trust. And then the other is, is a spousal trust. When you pass away, you might want to have assets placed into a trust for the benefit of your spouse. And the spouse can be the only person that benefits from those assets to qualify as a spouse. So he or she would get the income and capital from that spouse and then any residual assets would then go on to other beneficiaries like children and grandchildren and so on. So it just means that the settlor of the trust is able to manage the assets or at least provide clear direction as to how those assets would be managed and how income and capital is to be paid out of the trust. And the nice thing about that too is it protects that, that capital from, from creditors, any kinds of claims and so on because that, that capital can only be in there for the benefit of the trust or for the spouse. There's something called a life interest trust. The types of life interest trusts out there are alter ego, joint partner and disposal trust. So a life interest trust is established when spousal trust me down earlier than 65. But an alter ego trust and a joint partner trust can only be established when 65 years old. And if you're an individual, the alter ego trust, that person that could benefit from that trust is you, the settler of the, of the, the, the trust. So you can be the only, only one that benefits from it. And, and you can roll capital property into an alter ego trust or joint partner trust tax free. It's a tax free rollover. And then when you die there's a deemed disposition of those assets in the trust and then the tax are due then. So I think misinformation about life interest trust. Some people think that hey, we can just roll this money, this, this capital or these assets into the trust. The alter ego trust or joint partner trust, we generate income and benefit from capital in that trust and we die. There's no tax because, because the individual doesn't own those assets, which is true. But you can imagine how the department of Finance looks at that is that if you could do that, everybody would do it. So what they do is they say, okay, we're going to allow you that rollover under very specific conditions. You can be the only beneficiary of that trust. And then when you die, any tax that would have been due on the gain on those assets is now due in the trust. And then there's something called a bear or a naked trust. So often some of you may have gone out and said, okay, I want to buy an investment contract and I want to buy for my grandchild. And the grandchild is a minor, so the minor can't own the financial contract. So we're going to hold it in trust. We'll assign somebody as the trustee of that contract contract until that minor's age of majority or age 19. That is, that's referred to as a bear or naked trust. There's no formal document usually, and the trustee has no other obligations and no other duty in terms of the care of those, those assets, except for just looking after them. They can, they have no discretionary power at all. And then when the, when the beneficiary turns 18 years old, the beneficiary can apply to have those, those assets released from the trust to them and the trustee can't do anything. So that's a bearer or naked trust. They can apply to the court, court, and nobody can say no. Whereas the other types of trusts, you can decide just when those assets are going to be released to the, to the beneficiary. So the child might turn 18, but with a formal trust, you might think, oh, I don't want my child to get all that capital when they're 18. I want to leak it out over a period of time. So we'll give some of them when they're 20, some when they're 25, 30, and you can do whatever you like. That's the beauty of a trust, is you can write that trust document in any way you want to determine how you want that capital and income paid out. This is the source that I got the information on the different types of trusts. Okay, I've already mentioned that there's two types of trusts, and there's a testamentary trust, and that's subject to graduated rates. But starting in 2016, only a graduated rate of state or GRE is taxed at the graduated tax rate and only for the first 36 months after that, that graduated rate of state is subject to tax on income inside the trust at the top marginal rate. So generally what happens is when this tax at the top marginal rate, the trust earns the income from the assets and holds it files the T3 reports that, but then it pays that income out to the beneficiaries and then that's a deduction of the trust. So it means there's no tax in the trust because it just, it just earns it and then pays it out and then that income would be taxed in the hands of the beneficiary interviewers. Trust, as I mentioned, is the trust that is established when you're alive and in most cases that's taxed at the top marginal rate. So for, for example, in Saskatchewan our top margin rate is 47.5. Those of you in British Columbia it's 53.5 and Alberta is 48. So everybody has a, has a tax rate that's roughly around that 50% mark. So unless you're a special type of trust like a graduated rate of state, then your tax at the top marginal rate so you can see exact exactly what the government's trying to do there is, that is they're going to tax you at a high rate inside the trust to encourage you to get that money out of the trust and into the beneficiary's hands. So interviewable trust, this is where I see them most often used in, in the nature of my work they're most commonly used in business planning context, but they're also used to own life insurance. But I, I, I see them used a lot and I'm going to show you an example of this at the end of the session where, where they use in the business planning perspective. And this includes spousal trust, alter ego trust, joint partner trust and family trusts. So trust document governs the trust, such as a will or a deed of trust. It's a formal document just like a will, but again, again it's not an entity. And the trust document names the initial trustees and replacement trustees. It identifies the initial property used to settle the trust or create the trust. It specifies the power of the trustees to make decisions regarding investments and distributions to the beneficiaries. And the beneficiaries are named specifically by class, such as children, grandchildren and so on. So again, if you've got all these things, you know you've got a formal trust. And a lot of cases the, the trustee is given discretionary power over how the assets are managed and so on. But the trust can specifically dictate how that's going to be done. But the trustee, if the trustee is given discretion, then what they, they say is that so long as they're making decisions that they'd make if it was their own money is essentially what they're trying to say, or I'm trying to say. This is really important to know when it comes to trust is the 21 year rule. And I think this is one of the things too that a lot of people don't know that gets people thinking, okay, it's a tax avoidance mechanism. And there's no such thing as tax avoidance that if you're caught, you wouldn't be punished or tax evasion, you would be punished. The 21 year rule, it says the Income Tax act requires a deemed disposition of capital property in the trust. So the capital gains tax can be paid every 21 years. So once a trust is established, we have 21 years for that property to grow. And, and it can be all tax deferred because they're capital assets. So land, buildings, shares of a private company can grow. But, but at the, the 21st year, if we don't do something with that property, that property is deemed to be sold. So of course it's not sold, it's just deemed to be sold. And, and deemed to be sold. And actually, actually sold from a tax point of view are exactly the same thing and be taxed at the top marginal rate inside the, inside the trust. So that's, that's a number that everybody has to keep their eye on. Because if you don't keep your eye on that then, and you're deemed to have sold those assets, that's a big tax liability inside the trust. And you've, you've really negated a lot of the advantages of owning that trust in the first place. That 21 year rule does not apply to all trusts. So if you've got a qualified disability trust, that rule doesn't apply. If you have a spousal trust, it doesn't apply. Or an alter ego or joint partner trust. So eventually those assets will be taxed. It's when the beneficiary dies is when they're going to be taxed. And you can understand why because a lot these people are using these trusts as a form of income and so on. If we have to tax that at the end of the 21st year, it's going to lead people in very difficult position. Why create a trust? There are a number of reasons why you might have a trust. And, and a lot of this makes sense. Again, what are we doing to the trust? We're moving assets away from the original owner to another owner that's going to own and control Those assets for the benefit of another group of people or another person. So, so why would we do that? And one of the reasons why we might do that is we have an intent to provide for a minor that's incapacitated. Incapacitated or disabled beneficiary. So, so yeah, if we have somebody that, that is challenged or incapable of managing money and so on. A trust is a magnificent tool because. Because now we can put that capital into trust, have it managed by a trustee, not managed by the beneficiary, and then control the income and capital distribution to that beneficiary. They don't have to do any work and make any decisions on it. We want to preserve the eligibility of a disabled beneficiary to government benefits. And that's. If we have a special kind of trust, qualified disability trust, then then that allows us to pay income and capital out of the trust. But that income is not going to offset or negate that that individual or the beneficiary from qualifying from government benefits. So it's got to be a special kind of trust and, and meet certain requirements, of course, but once it meets those requirements, now you can get the income from the trust and you can get the income and support and services from the government without having to pay for them. This is a big one here is protecting assets from creditors. Once I establish a trust and move money or move assets into the trust, I no longer own those, those assets personally. They're in the trust and my trustee now owns those assets. And if I'm sued or some creditor comes after me personally, then the assets in the trust are not my assets. So they can't attack the trust assets. The other, the other thing too is in moving assets into a trust where somebody is concerned about marital breakdown of a beneficiary, then in the assets inside the trust are not part of matrimonial property. So the child or the grandchild might be a beneficiary and receiving benefits from the trust, but if their marriage fails, the exiting spouse has no claim on the assets from the trust. We can protect assets from spendthrift beneficiaries or other beneficiaries. So, so where you have people, and I see them used here, where people feel an obligation to look after their children or their grandchildren, but they don't have the confidence that the child or grandchild has a capacity to manage the money, but they want to make sure they have the financial security that they want their family to have. So a great way to do that is you just don't give the child or the grandchild, the money, you put the, the assets into a trust and then have the trust leak out income and capital so that they, if they do spend it, they can just, they just spend it in little chunks. They can't spend the whole thing. Another thing a trust does is it helps achieve privacy and confidentiality. A trust is not like a will. A will is a public document. And so you can go to the courthouse downtown and ask for anybody's will and you can get anybody's will. You can see exactly what they said in the will, who their beneficiaries were and what they left to the beneficiaries and so on. A trust is not, is not a public document. So if you're looking for, to achieve privacy and confidentiality as to who gets what and to what extent they get benefits, the trust is a really good tool. And another thing you might do too is provide for charitable purposes. The trust might be a foundation, for example. And that foundation I see very high net worth families do this, is they'll set up a foundation and the foundation is a trust. And that foundation is established for the purpose of generating income and providing capital to the charities of their choice. Deferred tax on capital assets and this is the area that I spend the most time on, is that as a family is growing wealth. And particularly in a business, they're growing that wealth with corporate dollars in many cases. So corporate dollars, as you probably all know, are taxed quite a bit less, less than, than a personal dollar. So we're growing wealth inside that company and the intent is to transfer that company or that wealth onto the next generation or next two generations. So what do we do in this case? So what we need to do is, or what, what we should look at doing is, is let's do something called an estate freeze. And a state free is a, is a very useful tool because we can freeze the value of somebody's wealth today.
Inside a company, or move assets into a company and freeze that value. And now, even though that business continue to grow in value, the tax on generation one is based on the frozen value so that that tax liability never goes up. The only way it will go up is that the tax rates change or the capital gains inclusion rate changes. So right now the capital gains inclusion rate is 50%. You know, some of you may, may remember the 90s, it was 75%. So if the government went back to a 75% inclusion rate, that would increase that tax. But the assets will not increase in value. We know right to the Dime what those assets are worth. And so from a business planning point of view, it becomes a very, very useful tool. And again I'm going to show you an example later on. And it reduces estate expenses as trust assets do not perform part of the estate. So, so you have executor fees, you have probate Alberta, nobody cares about probate in Alberta because there virtually is none. I think it's a flat rate of 400 bucks in Saskatchewan is $7 per thousand. But in the trust are not part of the estate. Any estate costs or any tie up in the estate that wouldn't affect trust assets because those assets aren't there. Okay. That's all I'm going to say generally about trust. Let's talk about where trusts are used in a life insurance context. So why would you use a trust to own life insurance? Well, in cases, I see cases where somebody says okay, I like the idea of using life insurance. I want to buy life insurance on my child or my grandchild. The person establishing that contract is likely to die before the child does or the grandchild. Hopefully they want to be able to control the cash value and death benefit for a long period. So they'd like to be able to control that, including after the death of the settler. So let's say grandpa or grandma wants to buy a policy on their daughter or son. You can, you can certainly put that policy into a trust. So if it's not in a trust, what you can do is you can pass that contract over to the insured child on a rollover basis tax free, which is a wonderful feature. But if you don't have confidence in the child to be able to manage that contract and keep that asset there for what it was intended for, they just cash it out. Then you might want to put it in the, in the ownership of a trustee.
So it keeps the life insurance separate from the settler of the state. So again you have privacy, it prevents any will challenge and you have no probate tax on that asset. So again it's about controlling that asset from the get grave is what you're doing. So why is insurance quite an ideal asset for a trust? Insurance contracts are not subject to the 21 year rule. So do you think about that? If I, if I put private company shares or land or building or any capital asset into, into my, into the trust or the trustee would own it at the end of 21 years I've got to move that asset out. Otherwise it's deemed to be disposed of or sold inside the trust. A life insurance contract does not face that, that same tax rule. And the reason for that is life insurance is not considered capital property. And this word is kind of goofy. It says down, you can see here, not considered capital property. However, it is considered trust capital. And so as trust capital, we can transfer trust capital out of the trust without triggering a taxable disposition. But at the end of 21 years, we don't have to move that life insurance contract out. It can stay in there as long as the life insured is alive until they die. And that could be the daughter or son of the person that bought it or the granddaughter, grandchildren of the, of the person that bought it. It can be there for a very, very long period of time. And the nice thing with life insurance contract too is that you know, whether you want it in a trust or personally or inside your corporation, if it's structured properly, there's virtually no administration or management responsibility. So it's, trustees love them because there's nothing to do. They just, they just watch it. And, and they don't have to manage the asset. And the growth inside the contract is all tax free. So with a life insurance contract you have an insurance benefit, you have a cash surrender value. And over time both those values are getting bigger and bigger. But remember I talked about how if an asset generates income as top tax at the top marginal rate, a life insurance contract can grow in value, but it doesn't generate taxable income. So it's growing in value, but it's not generating any income to the tax to the trust and be taxed at 50% it can experience wonderful growth because there's no tax. And we can leave that asset in that, in that trust for a long, long period of time. So let's talk about a typical situation here. So let's say we've got a business owner, he's got children, five grandchildren, and he's got a, his two kids or a son that has two children and a daughter has three children. And he wants to leave money to the grandkids when each of his children die. This chap has little confidence in his sons and daughters ability to manage the money. So not all people are like this. But this guy is thinking, okay, I want my grandchildren, I want to guarantee my grandchildren some value down the road when my own children die. And if I buy an insurance contract on my child, one of the things I can do is I can make my child, the insured child, a contingent owner. When I die, the ownership just transfers over to my insured child and there's no tax on that so that it's a great way to transfer value to the next generation. No tax to you as the original owner of the asset and no tax of the child. But if you don't have confidence in the child's desire to maintain that asset for the benefit of the grandchild, then that probably wouldn't be a good idea. So what this chap does is, is he's going to establish a trust and he actually establishes two trusts. Here. He buys a client wants to buy an old policies on both his son and his daughter. So he's going to create two trusts. He's going to create one for the son, for the benefit of the son's two children, and he's going to create another trust for the policy on the daughter for the benefit of the daughter's three children. So the son and the daughter are not going to own the contract. And in fact the grandpa or grandma here doesn't own the contract either. Because as soon as we buy the contract, that contract is settled into the trust and the trust owns it right from the get go. So because we don't have the 21 year rule, that trust can be there for a long period of time and that those contracts will grow over a long period of time and not attract any tax to any individual, whether it's been beneficiary, trustee or the original settlor, or the insured daughter or son. And then when son and daughter ultimately pass away, the trust is the beneficiary of that policy. The trust receives the payment from that policy and then the trust document would then determine or establish how that that capital would be paid out to the grantor. So each trustee, initial trustee is the the client and his will appoints a replacement trustee because that grandpa is not going to be around or grandma's not going to be around forever. So we need somebody to be the trustee down the road. And generally it wouldn't be the children or the grandchildren. When insured child on each policy dies, the proceeds from the policy be paid and used to benefit the children of that child with clear rules on the investment and distribution. So you can see what's being done here is that we put the insurance policy inside the trust. That policy just grows. The insured is the two children, the daughter and the son. And then when they die, the life insurance proceeds are paid by the insurance company into the trust. And then the trust document then specifies how those proceeds would be paid out to the grandkids. So it's really a bulletproof way to make sure that wealth is passed down to that third generation.
So as I mentioned before, a trust is not a public document. So you have that privacy is assured and the terms of the trust do not need to be disclosed to the beneficiary. So if you've got multiple beneficiaries and multiple grandkids or kids, and you don't really want each one to know who's got what and to what extent they're getting something, then the trust would certainly specify who gets what and to what extent. But, but each beneficiary has no entitlement to find out what that trust says. So it's a great way to maintain that privacy where you might think that, okay, if I, if I'm not equal, it can cause problem or nobody would, unless they talk, nobody would know it's not not equal.
So even if a will is challenged, the trust is not part of it. So again, the will manages the distribution of assets from the estate. And assets in the trust or in the hands of the trustee are not part of the estate. So that wealth is kept in a separate place that, that is not exposed to any challenges on the the estate. We just talked about establishing life insurance contracts and putting them in the trust. So the trust owns them. That trust would pay for them. And the trust is a beneficiary. Here we're going to talk about an insurance contract that's established, but the trust doesn't own it right away. We've established a trust or we're going to move the proceeds into a trust at the time of death. So, so the trust might be established, but there's nothing in it yet. But the insurance policy is created and the beneficiary of that policy is the trust. So the trust will be flooded or funded with the insurance proceeds at depth. So the use of trust to receive insurance benefits, that's it's just called the life insurance trust. And we're designated trust as a beneficiary of life insurance policy. And it has benefits, so it has the same kind of benefits that you would think that you would see in the previous example where it controls that distribution of the death benefit. But the policy isn't in the trust right off the bat, it's outside the trust. So the testimony trust can receive the insurance proceeds. There's three, three methods of doing this. One way to do it is the beneficiary of the of the insurance policy is the estate of the insured. And then the proceeds are directed to a testamentary trust. Remember to trust created at the time of death. So that trust is established when you die. And that testamentary trust was designated in the will, but that would again attract probate tax. Now Burtons don't really care, but. And in other parts of the country the probate tax a little bit higher. So this method of doing it would attract some probate tax because the insurance proceeds would end up in the estate first and then go into the testimony trust the other way. Two ways to do it is designate a trust in the will and specify that the trust has received the insurance proceeds on death. So what happens now is the insurance proceeds don't end up in the state at all. The trust receives the insurance proceeds directly. So because the insurer, the trust is receiving it directly, there's no probate tax because the estate never received it in the first place. So that's the only way something could be probated. The estate has to receive it. So the, the assets in the estate, it may be probable. And then finally is a more formal way to do it is that here we're funding a trust that, that's established in the will at the time of death, whereas here we have a separate trust document, but the trust is not settled yet until the death of the insured. So that document is there. It's a separate trust document. And then the, that that trust would receive the insurance proceeds at the time of death. And the same result, you get the same result as over here you'd have no probate tax. So of course these two are a little more attractive to do it this way just because it, that that money never ends up in the estate in the first place. And, and I think anytime you can keep money out of the outer estate may be useful depending what your circumstances are, because an estate can be challenged. And once money is in an estate, even if the will says, okay, here's where we want it to go, if somebody's challenging the will, we can't, we can't get that money out of the state until we have clearance to do so. Okay, that's all I've got to say about that. I want to talk about using trust and life insurance when transitioning family businesses. So here's, here's an example and anybody that's of my vintage, which you grew up in the 60s and 70s, there was a television show called Sanford and Son. And Sanford and Son was a terrific show. It's, it was a great half an hour comedy. And there's a chap, his name is Fred Sanford. And, and he had a junk company he called Sanford and Son Salvage. And so he, he Owns that company directly today. And, and so whatever that company's worth, it doesn't really matter. For the purpose of this discussion here, he owns that, those shares and, and he owns all the, the common shares.
But here's Fred's. Here's Fred's circumstances. We know Fred's getting a little older. He's got gray bear, gray beard and gray hair. And anybody remembers the show, Fred was always complaining he's having a heart attack. So he, he could die at any moment. At least that's what Fred led you to believe in the show. And Fred had a son. And Fred's. Fred's son's name was Lamont. So here's Fred's dilemma. He's getting old. He's got some health issues. He's running a very successful company that's growing. He's got a son, Lamont. But, but some of you remember the show. What did he call Lamont? He always called Lamont the big dummy. So he has no car, has no confidence Lamont to own this company yet or take over the company. So Fred wants to structure his business affairs in a way that, that limits his tax liability on the company's value today. It allows him to get money out of the company into another company so he can use that for retirement if he wants to. And ultimately he wants Lamont. He wants Lamont to own the company because that's what he said. Lamont said, hey, dad, you know, one day I want to own this company. I want to take it over for me. So how do we go about doing that? And Fred said, okay, I'd like that, too. I'd like to leave that legacy, but I, I just don't believe you can do that today. So here's where he's at. Here's what Fred's objectives are. He's growing a successful company from nothing. So he wants to fix his current tax liability and know exactly what that tax is going to be so that we can plan around that. He wants to preserve his capital gains exemption opportunity. And so the capital gains exemption is when you sell the shares of a private company or you're transferring the company to the next generation. Today, that's $971,163 is tax free. So it'll save him about 240,000 bucks of tax if we can use that. He wants to be able to multiply the capital gains exemption opportunity. So is there a way we can, we can share the capital gains exemption opportunity or multiply it so Lamont would have that same 971if we structure this properly, Fred wants to be able to remove assets from salvage that are not used in salvage and he doesn't need for income and get them into a safe place without having to pay tax personally. So how do we do that? He wants to transfer future gains. So as salvage, as salvage continues to grow in value, he wants that growth to be in Lamont's name but not transfer ownership to him yet and control to him yet. And the other thing he wants to do is possibly generate income with this structure. So what, what you see here folks, those of you that own private companies and some of you may have done this in your own families already, this is called a Section 86 estate freeze. So in the Income Tax act, what the tax act allows us to do under this section 86 is, is freeze the value of Sanford and some salvage at whatever its value is. We're going to establish a brand new holding company called Salvage Sanford Holding Company. And we're going to create a family trust, Sanford Family Trust. And Fred is going to be the trustee of that trust initially. And Lamont and the Holdco are also trust beneficiaries. And so all the, the growth shares are the, the common shares are now going to be owned inside the family trust. So all the future growth from this point on of, of the salvage company is in the trust because the common shares are there and because Fred has given us his, the common shares to the trust, he takes back back fixed value preferred shares for the value of the company today. So you'll see that it's fixed value. That means those shares will never increase in value. And so from, from a financial advisor and a tax planning professional's point of view, we love this tool because it makes it really easy. The goal posts aren't moving. Now we know what the tax liability is going to be on Fred's when Fred passes away. We can plan for that and then, and then we can move on to the next generation. Now deal with Lamont. So when you think about these objectives, have we fixed this current tax liability? Yes, we have. With that freeze, we fix it at today's value. Have we preserved the capital gains exemption opportunity? Yes, we have. There's a very special rule here that in order to get the capital gains exemption opportunity, if somebody comes along and buys the shares of Sanford and Son or Fred dies, the 90% or more of the assets inside the operating company must be used in the operating company. If you have a bunch of cash or, or even an insurance policy, but cash value inside that policy if those assets, those investment assets exceed 10% of the value of the company, we don't get our capital gains exemption opportunity. The shares are not, not qualified. So we not only would not get it for Fred, but we wouldn't get it for Lamont either. So you have to keep a real close eye on that. The can we remove passive assets from the salvage company? Yes, we can. We've set up this new company here and this new company is a beneficiary of the trust. So we can take investment income out of the transfer out of salvage and move it through to the holding company as the holding company is a trust, is a beneficiary of the trust and we can do that tax free. So that, that's an intercorporate tax free dividend transfer of dividends. And now that money's in Sanford Holdco and now Fred can do whatever he wants with that money because he's the owner owns 100 of the common shares of the Holdco so he can buy insurance in there if he likes. You can buy property in there, you can buy investment funds in there, you can do whatever he likes. And it keeps, it keeps the operating company clean to, to sell if he wants to and get the capital gains exemption. So we've accomplished that. Have we transferred future gains and potential ownership to Lamont? Yes, we have. But Lamont is not a current owner today, but he's a beneficiary of this trust. So remember the 21 year rule, what Fred can do. Now these common shares have a zero cost base. They start off with zero cost so it hasn't cost them on anything to get into the company. Those shares are going to increase in value as salvage continues to increase in value. And we have 21 years to roll those shares out to Lamont on a tax free rollover basis to him personally. So we got lots of time to do that. So Fred can decide to do that whenever he wants or you can do that on death. So so now all the future gains now will be in Lamont's hands and we just start the whole process all over again with the next generation. So it really is a wonderful structure. And then the last thing is Fred is saying, well, I might want to unlock equity from my company to produce retirement income for myself. So how would we do that here? Well, he could certainly continue to draw dividends on his shares, draw income dividends out of whole co if you wanted to. But the other thing he could do is he could redeem these, these preferred shares so the company can buy those shares back from him in his retirement and he'd be taxed on that, of course. But it's another way of generating income. So there's all kinds of ways to generate income. So this structure has given us lots of different opportunities from a planning perspective to manage tax, transfer the business, magnify wealth, reduce, reduce tax liabilities. It's a very, very common structure and it's called a section 86 breeze.
One of the first questions we got, Chris, was can cash count as property within a trust?
Yep, certain can. And trust can own anything. And again, it's not the trust that owns it, the trustee, but you can have any asset ready in a trust structure.
Excellent. Next question is, will a trust expire after a certain number of years in Canada?
The trust doesn't expire. The trust can live forever. Really. The question now is that 21 year rule, it's a disposition of those capital assets. So you might have a disposition of those assets at the 21 year, but the trust doesn't disappear.
And the trust document can be written in such a way to have the trust expire at a certain point. But that would be your choice as a settler and the establisher of that trust.
Next question. He says, since trusts don't have to be registered with the government because they exist in the private, not public, why does the government have any right to tax it?
That's a really good question. But the government does everything within its power to make sure that if you're an individual earning income or you're a company earning income or you're an asset earning income, they're going to want a piece of that. And a good point, because that's the thing, I think that's a big piece of misinformation that's floating around in the market today is people look at trust as a tax dodge. It is not a tax dodge. And as you've seen tonight, it's a great way to manage assets beyond the grave. And it's a great, it's a great way to defer tax, but you can't avoid or evade tax with it.
Excellent, thanks for that. Now the next question says, can a trust be a beneficiary for whole life policies?
Oh, yes. Yep, they sure can. So that one example I gave you, where you buy a whole life policy or a UL policy or even a term policy, really doesn't matter what the policy is, you buy it on your life and, but, and, but, and then you establish a trust, a testamentary trust in your will. So in your will you'd Write into the right into the will that, that you've got this trust. That trust is, it's not, it's not a legal trust document or a trust document but they, there's direction in the, in the will to establish a testimony trust when you die to receive life insurance proceeds. So I, I think that's a great way to do it. If I want a policy on myself or my wife or what have you. And, and I wanted, I wanted. We don't have any kids of our own. We've got lots of nieces and nephews and now great grand nieces and nephews. One of the things I was thinking of doing is because I don't have my own kids, one of the things I might do with all my life insurance policies is do just that, establish a trust in the will, flood that trust and then I can, that frees me to spend all the rest of my money and then that, that trust would be the only thing left with cash. And then I could, I could pay for the education of great grand nieces and nephews and, and as long as there's money in that trust I could fund their education. I'd buy them a four year degree.
And the next one is. What about the difference between revocable and irrevocable trust?
All trusts are, are irrevocable. To get the tax benefits from a trust it must be irrevocable. If it's revocable, that means the trust assets can revert back to the settlor. And if you have a revocable trust, big risk that the gain on the assets that are held by that trust would be attributed back to you as a settler. So you could do it, but there's tax risk.
And the second part of that question was can a irrevocable trust be used to carry out a business as an alternative to at LLC corporation like being.
Incorporated, the trustee owns the assets settled into the trust. So the trust often owns shares of private companies. So a limited liability corporation, yeah, the trustee, the trust, the trustee could own, own those shares because they're just shares. Right. So the example I gave you with Fred Sanford is that that trust, the trustee, the trust owns those, owns those shares, those common shares. It'd be no different in this case.
If there is a will and a.
Trust which takes legal precedent, they're two separate things altogether. It's like you got two separate entities. So the two have nothing to do with each other. Right. So what, what goes on in the estate? That's the will. What goes on the estate what goes on in the trust? That's the trust. Right. So it's almost like you have two separate people there that if they're. They're certainly. They're linked. But. But they're from a tax point of view and, And a wealth transfer point of view. They're not linked.
All right, next question. This is one that says this person has this believes there is a case law where revocable trusts have been forced by the court to return assets to the grantor. So a judgment can be made on those assets. This is not a possibility for an irrevocable trust unless it is ruled defective grantor trust. I believe that's correct. Not a lawyer, though.
Yeah, it sounds like that's a lawyer with that question. So they would know more about that than I would. But, but you're right. An irrevocable trust, as I mentioned, the big thing with irrevocable trust is, you know, can those assets be. Can be taken back by the settler? And so, so you can see how the government would look at that. Is it okay if you're establishing these trusts, this trust, but you can take that at that asset back, then the income from that. From those assets should really be attributed back to you. Exactly.
Yeah. So revocable trusts are just not a good plan at all.
But they are possible.
They are possible.
Yeah.
Now the next question comes in. It says the company must be clean 9010 for 24 months. Correct? I don't understand that question.
Yeah, yeah. No, here's the question, Dan, is it is. And I didn't get into great detail there, but if you want to benefit from the capital gains exemption, either through the sale of your shares or the transfer of your shares, like we did here with. With the Sanfords in some case at the. At the time of that transaction. And, and also when you die. When you die, you can also claim the capital gains exemption when you die and. And save tax on that. But the. Here's the rule. It's called the 9050 rule. 50 or 24 months prior to that event, no more than 50% of the assets held in that corporation can be investment assets. And that includes insurance policies, mutual funds, real estate that's generating income, all have to be considered investment asset. So that. That's the 50 rule. That's 24 months prior to the transaction. At the time of the transaction, no more than 10% of the assets can be investment assets. So if you fail, if you fail either one of those, you just don't get the capital gains exemption, which means you pay another 240,000 bucks of tax.
What is ACB and PUC adjusted cost basis.
And PUC, PUC paid up capital.
Paid up capital?
Yeah. That's a really good question. Not many people ask that question, so congratulations whoever asked it. Adjusted cost basis is the cost of the shares that when you issued them. So, so for example, the example I gave the Sanford and so those new common shares had a cost base of zero. And so that's, that was the cost of those shares. Fred's common shares might have had a, had a cost base of zero. It's a cost of a share. Paid up capital is the, is the contribution of capital from the shareholder to the company. So, so here's an example I'll give you. Let's say I start a company and I seed that seed my new company. So I give my new company a hundred thousand bucks and, and to seed capital for that company and I take back a thousand, a thousand shares for, for that a hundred thousand dollars I gave my company. So my company gives me back a thousand shares. So a thousand into a hundred thousand dollars. That's a hundred dollars a share. So, so when I establish that company, my cost base on that is, is a hundred dollars a share and my paid up capital is a hundred dollars a share because I put a hundred thousand bucks of my own money into it. So paid up capital can be returned to me tax free because I that 100,000 bucks I paid, I paid tax on that 100,000 bucks. I'm just seeding my company that hundred thousand bucks so I can get that out tax free at some point. So let's use this example. Let's say I grow that company now from a hundred thousand dollar company, I establish it to a million dollar company and then Dan, you come along and want to buy the company from me. My company's not worth a million bucks. So you. So, so the, the capital gain on that transaction would be a million bucks minus $100,000, the cost base. And so now your, your cost base, you own those thousand shares. But, but the, the value of companies a million bucks. But the paid up capital is still $100,000 because you didn't make a contribution to capital. You're the new shareholder, but you didn't make a contribution to capital. You just bought my shares. You. So now the adjusted cost base, you've got a high adjusted cost base because you paid for paid a million bucks divided by a thousand. But the, the paid up capital is no different. It's still a hundred thousand dollars.
All right?
I hope that explained because that's, that's a really common question. People wonder what's acb, what's puc? And, and they're, they're measured differently. When you go to, on a company's financial statement and you look at shareholder equity and it says 10 bucks or $100 or something, it usually says a number like that, that's your payout capital. Right.
Excellent. So question from Stephanie is if the life insurance is owned within the trust, would we be able to borrow against it?
The trust can borrow against it. Right. So because it's in the trust, the trust is paying for it and the trust can, can borrow it. And then that was the intention. There's, there should be direction in the trust document as to what you do with those borrowed funds. So that would, if, if that's what you're contemplating to do. So the trust document would have to allow you to do that. So the trustee be written. So they say, okay, that's, you're allowed to do that at the trust. Allowed to do that. And here's how those borrowed funds would be used. So yes, it's a possibility, but it should be written in the trust.
And then we get the question, which, this one doesn't surprise me. People would like to know what it costs to create a trust. And so that's probably not an easy question to answer because trust can be so different.
Yeah. And the complexity can be very different as well. But you know, if we have any lawyers on the, on the call tonight, I'm not sure if, because I, I really don't know. I've seen, I've seen fifteen hundred dollars, I've seen five thousand dollars. I've seen everything in between. You know, it's not exorbitantly expensive, but, but, but there, but it does cost to set it up for sure. And it's a lawyer that sets it up. It's a trust in estate lawyer that sets it up. So Dan doesn't do that. I don't do that. You don't do that. It has to come from a trust and estate lawyer.
Yeah, well, that's a great point. And what I'd like to remind people is like what we're giving you for information, you still want to go and get, you know, the advice of a trust and estate lawyer.
Yeah, for sure. For sure. Yeah.
All right, so next question is, is it a good idea for a settler to be the trustee?
Yeah. In most cases the settler is the initial trustee, and then they, then they appoint other trustees following their death because the Whole idea of the trust is, is to transfer assets and have them managed beyond your lifetime. So in a lot of cases the trustee is as you saw in the Fred Sanford situation, that's often the case is that the, the business owner is the trustee of that trust but then they, they assign another or have it, have it written that here's who's going to take over the, the, the trustee on the responsibility when I'm gone.
Good answer. So how many future generations can you assign your wealth to through a trust?
Ah, well, how many future generations, how many generations do, can be alive at any given time? You know, you look at, at my mom and dad, my, my dad just passed away but my mom is around and, and, and so she's got five great grandkids now. So you could establish it so that it's like my idea with the flooding of trust with insurance money for future generations for the use of education. I could fund the family members education and those are family members I will never meet. So as long as there is, there's capital in that trust, I'm managing that trust beyond the grave. And that could be 200 years. You know, it could last for a very long time depending on what the cost of education is and how many, how many kids are in the family. Yeah.
Yeah. So that's exactly. Good answer because you can, it can go on beyond forever.
Yep. As long as there's assets in the trust. Yep. Yep.
You talked about owning life insurance policies in the trust as a, as well as owning a policy and on the death, the death benefit goes to the trust. In the first example of ownership inside the trust, can you still access the policy for policy loans or collateral loans or is it locked in the trust in the latter option?
Yeah, that question was kind of asked before. It was yes, the, but the trust control, the trustee controls it now. So, so the trust document would specify the, the, the just what the trustee is eligible or able to do. And so, so if you want to use it for loans, I would think if you have a fully discretionary trust, that trustee can use that asset.
In the best way they believe for the benefit of the beneficiaries. So if borrowing and so on is in the benefit of the beneficiaries then you could justify that follow up question.
To that one is are loans from a policy and a trust tax free if pulled from the trust structure?
Let me get to that question. The thing I couldn't remember, I had a brain freeze there for a moment was prudent investor rule. So as long as the Trustee is following prudent, prudent investor rule, which means that they're managing the money as if that money was their own money, then they're on side with the management of that money. Here's what would happen is that who owns that policy? The trustee owns that policy, but it's in the trust structure. So if we borrow, if we do a policy loan, and certainly you folks are very familiar with policy loans, given the work you do, then the taxation is no different. You can borrow up to the adjusted cost basis of the policy tax free.
But it's the trust borrowing that. Now the question is what are you doing with the borrowed money? So if the trust document allows you to take that borrowed money to benefit the beneficiaries in some way, then, then you could certainly do that with the borrowed money. Now once, once you borrow beyond do a policy loan beyond the adjusted cost basis of the, the contract, then the difference between the cash value, the fair market value and adjusted cost basis is, is taxable in the year unless you repay that that difference back. Right? So the tax is really no different. It's, it's just in a different entity, that's all.
So similar question. Once the trust borrows money against a life insurance policy, can that money be used by the beneficiary or trustee personally without triggering any personal tax or, and repayment or in such as, you know, collateral situations?
Well, a policy loan is going to, is going to generate tax again if your cash value exceeds your adjusted cost. So that's the same no matter where you have of it. The question is, the question is, can you use it for the benefit of the beneficiary? Well, the trust document specifies that policy loans are to be used for the benefit of the beneficiary in some way. Then yeah, for sure. The trustee, unless they have fully discretionary control and they're following the prudent investor rule, the trustee might say okay, we're going to borrow against this policy and then we're going to use the benefit the beneficiaries in some way. So let's say pay tuition if it's fully discretionary, you could do that. Trusts are, are really a magnificent tool and they're largely misunderstood. You know, I know a chap from the, from the gym that I work, work out at and he was telling me one day that, that he was so upset with his, with his son in law because he's on his, on the phone with his daughter and, and he could overhear the son in law and this, this gym buddy of mine Pretty wealthy guy and his, his. You could overhear a son in law in the background saying, yeah, I guess I got, I got to treat the old man right so I can stay in the will. Well, that bug that just drove it just ticked off my buddy and he said, how, Chris, how do I make sure that that son of a gun doesn't get anything?
Hey, you might want to talk and look at establishing either a testimony trust or even interview with trust. And that way you can benefit your kids and your daughter. But not the, not the, the son in law. Yeah. Idea because that bugs so much. I know, I know. The son in law was probably saying a tongue in cheek and trying to make a joke. This guy didn't take it as a joke.
Yeah, kind of one thing that you can do with them is, you know, even from your grave you get to direct how those funds are spent. And it's like just an amazing tool.
And that ability to control assets are huge. And there's lots of circumstances where you don't want to just drop a big check on somebody's lap. Exactly. There's lots of people can handle that kind of, that kind of wealth, that, that instant wealth. So a trust is a magnificent tool for that purpose.
Sure. And so what, what I'm going to jump into now, just for a few minutes, won't take long. I just want to talk about the gradual inheritance strategy and just to give people another opportunity to think about. As I was speaking to. This is a, a strategy and it allows you to gradually transfer.
An inheritance to beneficiaries. And the process really is when you pass the proceeds of your life insurance and, or savings accounts, if you have them, are traditionally paid to your beneficiaries in a lump sum. Now, depending on your circumstances, you may prefer that your beneficiaries receive the inheritance more gradually. And Chris did a good job of speaking to why people find that something that's important for them because they just maybe not comfortable with this huge lump sum going to someone. Even as you get into life a little further, you may not want that to be the case where a person gets this huge lump sum because quite often when that happens, you know, it becomes pretty, you know, one of those things, people think about how they can spend all that money and, and it may be gone pretty quickly. So you can control how much goes to a person or persons over time. So how does it work? Well, you set up an annuity and you do this with the life company and it indicates how the proceeds of your life insurance or your savings account will be paid. So your decisions will include who the beneficiaries are. You can name them, name them, and there could be one or multiple beneficiaries. What portion of the death benefit will be paid as income payments and what portion, if any, will be paid as a lump sum. So you can, you know, very similar to a trust, you can start to dictate things even after you're gone as to how the death benefit or your savings are going to be paid out. And if the income payment, you know, if income payments will last for the life of the beneficiary, that's a life annuity or for a certain number of years. That's just a different name. It's called a term certain annuity. So if there's something you want to learn more about, you know, just set up a meeting. If you're already one of a client with us, you know, just set that up with whoever your advisor is. And if you're new, you know, we're going to give you a way to schedule a call where you can, you know, just meet with us and talk about whatever you'd like to speak about related to trust and even this particular process, if you have a trustee assigned. So with life insurance, you can sign a trustee for minors, for example. And in some other circumstances, such as when a beneficiary is an individual who has a development disability, there may be a trustee that signed even to look after it in that way, very similar to what Chris talked about in the trust we were talking about. And then upon your death, your beneficiaries will receive the guaranteed income in a manner in which you specified. And the thing is, the beneficiary can't change the annuity option or how the proceed proceeds are paid. So again, you get to be in control. You get to make those decisions before you pass.
And the other thing about this process, if anytime you wish to make changes or to choose to remove the annuity settlement option, you simply provide the life company with new written instructions.
So benefits over a formal trust. It is just another way of transferring inheritance over time. To establish a formal trust to control the estate after death. The annuity settlement option can be achieved many of the same goals as a trust, with the following advantages. There's no cost to set it up, it's your time simple to establish and has no ongoing management fees. And you can amend amounts or the beneficiaries at any time without having to pay a lawyer or amend or redraft trust agreements. So that was what I wanted to share with everybody. And.
Just to give you something else to think about when you're thinking about how can I manage something from my grave and lump sums on life insurance policies and such, that's just one other way. So I just wanted to share that with you tonight and let's just bring on the rest of my team and just see. Let's talk about wrapping her up tonight.
I want to just tell one other short story about how where a trust would have been really useful or even the new idea you just presented. I, A buddy of mine works at rbcds and a couple of years ago, clients of his died. Mom and dad died in a car accident in common. And they had one child, 18 years old. And, and they, and they weren't really, really wealthy, but they left her a fair bit of wealth and it was over 2 million bucks. And my buddy was managing this money and, and the daughter was of course the beneficiary of the whole thing. And she blew 2 million bucks in two years. And he could not, he could not stop her from spending. And so he tried to get the firm involved to say there's got to be a way to protect this girl against herself. And there was nothing they could do. She was the, she was legal age, she was 18. And, and, and he said that she was always calling up saying I need more money. And he, and he couldn't say no. You know, something like this would have been a trust would have been unbelievably valuable because she could have lived on $2 million for the rest of her life. Whereas she got blew through that in 2 million, 2 years. And like, how is that even possible? But you drop $2 million on the, on the lap of an 18 year old, things, things can get a little crazy. Yeah.
Yeah, that's exactly right. I think that's one of the huge advantages of the trust is really to help people from harming themselves because it's like we've all heard about, you know, the big lottery winners and how much of them actually have much money left 10 years later.
Yeah, that's right.
It's surprisingly how few have money left 10 years later when you, when they think, well, you know, I've got all this money.
About 15 years ago we had a young guy, Moosejaw, he won two lotteries back to back. And I think it was about 3 million bucks in total. And it's everybody. What. This guy's so lucky. And he was only 24, 25 years old. And, and so he's having a party and he's the Most popular guy in Wujawa. And so there was an article on, on in the paper on him a number of years ago talking and he's bite riding his bike to work because he, he blew through all that money but man, he partied, he partied it up. He had a good time with that $3 million.
Yeah, yeah.
I was, I was blessed to talk to a young man who signed a major league baseball contract and you know, his signing bonus was 2 million U. S and you know, when I talked to him, he had nothing left. And it's like you think, you know a lump sum like that like you said Chris would set you up for life. But so often, you know, we're on our own worst enemy when it comes to, you know, we got this big pile of money and we're going to spend it.
I heard somebody say something the other day, I thought it was a great saying. It says a different skill set to get wealthy than keep stay wealthy. And that's that. That's a really good point. You know there's business owners, a lot of business owners, a lot of people are really good at making money and getting wealthy. But, but how do you hang on to it now? And that's where insurance becomes very, very useful and trusts and so on. Yeah, exactly.
How's this all work? You know, should I have a trust, should I have a life insurance policy? I don't have one now. Yeah, I just encourage you if you have, you know, obviously you know we teach people about the process called becoming your own banker. We use dividend paying whole life for that. And it. And with this whole, the trust can be, you know, one of those tools that you can use along with that product. The living benefits and the are phenomenal. And then you know, obviously from a death protection is still the greatest exemption in the Canadian tax code today. Correct me if I'm wrong, Henry. Is the tax free death benefit of a life insurance policy.
We talked about policy loans in the trust and collateralizing policy owned by the trust or the trustee. Similar process. Right. Because trust is just a, it's just a relationship but it's all controlled by the trustee. So they can still collateralize that policy with a third party bank finance company and then get access to capital.
Right. So all the things you could do with a policy on the corporation or personally, you can still do all those things. The question is given the way the trust was structured and the way the trust deed document was written, will it allow you to do that and what's the purpose of doing that? So yeah, the mechanics of doing all that stuff, it's really no different.
Awesome.
Thank you. The open area I would just add is what's written in the trust documents that people very much think at a surface level they all have a trust instruction, but it's actually what's written in the details of those agreements is what gives you that ability, whether or not that option is available.
Yeah.
So here's a follow up question. How easy is to change the trust document once the document is established? Because people can not think about things five years from today, ten years from today. Can they go back and make changes if the trustee allows them to do it?
Yeah, I think you can. You can make changes to the trust like you make changes to your will. Like you can't, you can't revert assets back to the settler, otherwise you get tax issues. But if you wanted to, if you wanted to change the way beneficiaries recognized then, then I, I can't think of an example and there'd be somebody on the call that can correct me or, or prove me wrong. I can't think of an example where you couldn't, couldn't do that. That.
It'S just more lawyer fee you.
Pay in the lawyer. Yep, yep.
I, I would add too, when, when you're engaging into something related to these trusts and setting up from estates, it's really important to get crystal clear on your objectives and have a good perspective of a team to provide. Because I've as an example, worked with a client who relied on their trust in a state lawyer but didn't have a complete vantage point from a taxation standpoint. So the advice that they would give was completely solely on a legal perspective, but didn't take into consideration the taxation perspective too. So I just thought I would show that out there that it is very important to find that right professional not only in terms of disclosure describing what's in the trust document, but at the same time having the right perspectives, including taxation, if your goal is taxation or transferring and all of that stuff, to have the right suite of professionals supporting you.










