This wealth transfer will be concentrated in the hands of a relatively small number of families.- Carlos Cardone
In Canada, ISS Market Intelligence estimates the wealth transfer that will occur between 2023 and 2032 at $1.275 trillion, in its Household Balance Sheet Update and Rebased Forecast 2024 report. One trillion dollars represents one thousand billion dollars.
This $1,275 billion has already begun to change hands. According to ISS Market Intelligence, 41% of this transfer will be in real estate, i.e. $524 billion. The remainder in financial assets.
“Wealth transfers are skewed to the higher end. This wealth transfer will be concentrated in the hands of a relatively small number of families,” Carlos Cardone, CEO of ISS Market Intelligence in Canada (formerly Investor Economics), told Insurance Portal when he revealed the report's data.
Trusts will be an important springboard in this transfer of wealth to the next generation. Yet few people are familiar with their details, even those who have one, observes Andrée Couture, Regional Vice-President, Advisory Advanced Sales, for managing general agency PPI (PPI Advisory division). “Customers are surrounded by several advisors who set up the trust (accountants, tax specialists, lawyers). However, we often find that clients don't understand the structure they have in place,” said Couture.
Couture made these remarks during a panel discussion she attended with her colleague Jean-Pierre Berger, PPI's Vice-President, Planning and Business Development. Entitled Trusts and capital gains: business people count on you to lead the way, the panel took place at the Life Insurance Convention, an event organized by the Insurance Journal Publishing Group, and held in Montreal on Nov.13, 2024.
No need to know everything
You don't have to know everything. You are the conductor: you must understand the client's estate objectives.- Andrée Couture
Andrée Couture believes that advisors should not hesitate to recommend a trust to a client... or to explain the one they have. “You don't have to know everything. You're the conductor of the orchestra: you must understand the client's estate objectives, and how their business is structured,” she underlined.
Couture believes that the analysis of financial needs will arise from a simple question to the client: “What impact will a trust have on your estate planning?”
“The key is in the trust deed,” she says. “The deed must be drafted in such a way as to accomplish the person's objective, even after his or her death. The trust can be created by will (on death, A.K.A., a testamentary trust) or during the person's lifetime,” explains Andrée Couture.
Couture adds that the trust has the effect of “transferring your client's assets to another entity.” The client must therefore understand that the assets transferred will no longer belong to him or her. Trustees will administer them for the benefit of the trust's beneficiaries.
“The key is in the trust deed,” she says. “The deed must be drafted in such a way as to accomplish the person's purpose, even after his or her death,” explains Couture.
The person setting up a trust may allocate the assets to a particular purpose. They can also distribute them differently from one beneficiary to another: for example, allocating the trust's income to one and its capital to another,” she explains.
Couture lists the three conditions, in Quebec, that create a trust and the three parties it brings together:
Components of a trust
- Transfer of property from a person's patrimony to a patrimony of appropriation
- Assignment of assets to a specific purpose
- Acceptance by a trustee
Parties to a trust
- Settlor
- Trustee (usually three, at least one of whom is not a beneficiary)
- Beneficiary
During the discussion, Andrée Couture and Jean-Pierre Berger focused on trusts governed by the Civil Code of Québec. Trust rules may differ elsewhere in Canada.
Why create a trust?
Berger mentioned the three types of trust that he sees most often in clients' portfolios.
A testamentary trust is created at the time of the settlor's death. It allows assets to be allocated to beneficiaries according to the wishes of the deceased. For example, this trust will ensure that both the spouse from a second marriage and the children from a first union receive their share of the estate.
A family trust comes into existence as soon as the settlor signs the deed. If the settlor divests ownership of an asset to a beneficiary, he or she will continue to pay tax on the income generated by that asset. This would be the case, for example, in a transfer without consideration (gift) or an interest-free loan.
The asset protection trust allows the individual to transfer ownership of his or her assets without triggering a capital gain,” explains Berger. The settlor is the sole trustee and beneficiary of the trust. Taxes on assets transferred in this way will be payable at death. However, the settlor will be taxed during his or her lifetime on the income generated by the assets held in trust.
“There are limits to the protection offered by asset protection trusts,” adds Jean-Pierre Berger. If a borrower transfers the amount of his loan into such a trust and his creditor learns of it, the creditor will have one year to request that the transfer be cancelled.”
“In the event of bankruptcy, transactions can be reviewed up to one year in advance, and up to five years in the case of a non-arm's length transaction,” adds Berger.
Beware of the 21-year rule
Berger points out that family trusts are subject to a measure known in tax jargon as the “21-year rule” (see section 104, paragraph 4, of the federal Income Tax Act).
Under this rule, the settlor of the trust will be presumed to have disposed of all trust property on the 21st anniversary of its creation. This presumption will apply to all subsequent 21-year periods.
Transferring assets to beneficiaries is not always the best option.- Jean-Pierre Berger
Prior to the trust's 21st anniversary, the settlor may choose, among other options, to allow the unrealized gains on the assets to be realized, or to transfer ownership to the trust's beneficiaries. “Transferring assets to the beneficiaries is not always the best option,” says Berger. Especially when they are minors or lack the maturity to administer the assets.
Often a business owner, the settlor of a family trust, will have made an estate freeze. Preferred shares of his company are issued to him at a crystallized value. He will be able to defer the taxable gain, ultimately until his death. The future value of the company will continue to grow in the trust for 21 years, in the form of common shares. The entrepreneur must decide by then whether to dispose of the common shares or give them to his beneficiaries.
Almost everyone takes the shares
Berger observes that 95% of his customers choose to dispose of them. “It doesn't make sense to give all the shares to the children at that time, because they would become richer than their parents. They give them just enough so they can get their capital gains deduction,” he points out.
The 2024 Federal Budget increased the maximum capital gains deduction from $1,016,836 to $1,250,000 for individuals who dispose of eligible small business shares after June 24, 2024. This amount is cumulative for life. The annual taxable income inclusion rate for capital gains in excess of $250,000 was increased from 50% to 66.7% on June 25, 2024. Since Parliament has been prorogued, this might not happen.
This article is a Magazine Supplement of the December issue of the Insurance Journal.