Wednesday, October 5, 2005

Avoiding the Myth of Testamentary Freedom

Most of us are under the impression that we can leave our assets to whomever we want. This is not the case. A British Columbia statute – the Wills Variation Act – gives each child the right to dispute the parent’s will. If the child believes that the will is unfair, the child can ask for a larger portion of the estate without having to prove financial need and without the parent being around to justify his or her decision.

There are many legitimate reasons why a parent might choose to limit a child’s inheritance. The child may be a spendthrift or a drug addict, so the parent decides to leave the child’s inheritance in a tightly-controlled trust. The child may be financially secure, so the parent decides to leave most of the estate to charity. Or the child may have been estranged from the parents for many years. Whatever the reason, the child has the right to dispute the parent’s will after the parent’s death. There is a real risk that the parent’s plan could be thwarted.

In this situation, it might be necessary to pass assets outside of a will. If the parents are married and over 65, they can transfer their assets during their lifetimes to a joint spousal trust (a “JST”). The parents are the only beneficiaries during their lifetimes and are entitled to receive all the income earned by the JST. The JST could provide the parents with access to the capital of the JST for emergency purposes. On the surviving parent’s death, the JST would hold the trust assets for the other persons named in the trust deed.

An attack under the Wills Variation Act is avoided because the JST assets do not pass under the parent’s will when the parent dies. The Wills Variation Act only applies to assets passing under a will.

Transferring assets to a JST does not trigger income tax provided that the person establishing the JST is at least 65 years old. From an income tax perspective, it will be as if the transfer had not occurred. While there will be a deemed disposition of the assets on the death of the surviving parent, this deemed disposition would occur even if the assets were not held in a trust.

While a person would not normally establish a JST just to avoid probate tax, property in a JST does not require probate and so is not subject to the 1.4% probate tax.

There is a similar type of trust vehicle available to an unmarried individual (such as a widow or widower) who is over 65.

If a parent is concerned that a child might not accept the parent’s wishes as to the ultimate disposition of the parent’s property, a properly-structured JST can ensure that the parent’s wishes are carried out.

-- Devinder Sidhu

Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.

The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.