The spouse receives the benefit of the income from the trust and also, in most cases, has the right to use some or all of the capital. On the spouse’s death, whatever is left in the trust will be given to the children or to other beneficiaries named in the will.
A spousal trust can be set up for several reasons. One reason is for tax purposes as income earned by the investments held by the trust can be split between the trust and the spouse resulting in significant tax savings. Also this kind of trust is sometimes arranged because the person is concerned that their spouse might remarry and their children may lose their inheritance if the spouse doesn’t do a proper estate plan or leaves everything to the second spouse.
A spousal trust is often set up in a second marriage situation. Two people who are getting married for the second time want to preserve what they’ve brought into the marriage for the children from their first marriages. They might leave their assets, in trust, to their spouses for their lifetime and then the balance goes to their children when the spouse dies.
These trusts involve difficult and sensitive issues. I always caution my clients that, no matter how sophisticated the estate plan, a plan that doesn’t leave everything they own to their spouse still leaves their spouse the right on their death to make an election under the Family Law Act of Ontario as to whether they are satisfied with the gifts set out in the will or whether they will forego the gifts in the will to apply to the Court for an equalization payment as would apply in a divorce situation. A spouse might elect to make the application for an equalization payment because he or she believes that it will increase the amount of the inheritance. I always warn my clients that if they’re thinking about doing a spousal trust and they have any concern or there’s any possibility that the spouse may not accept the plan when the time comes, that they enter into a marriage contract with their spouse to protect the estate plan. If not, the will could be challenged.
If you, or someone you care about, is dealing with estate law issues in the Markham, Ontario Region, contact Charles B. Ticker for a consultation.