Financial and estate planning usually has a number of key objectives; accumulate enough capital to create a comfortable living in retirement, ensure the retirement income will outlive me, protect my loved ones if I die too soon, make sure my partner will be able to continue to live comfortably, and treat my survivors fairly.

Whether the individual is married, divorced, or living common law the issues are often the same.  The problem is our society has created rules and regulations over the years on the assumption that the majority of people are married to the same spouse they met in high school. Today’s families often do not fit that model; many families consist of children that are “yours, mine and ours,” which complicates the estate planning process and can make it difficult to find workable solutions and still meet the stated objectives.

Most estate plans begin with a will. This document dictates what is to happen to the estate when the individual dies. Couples often get joint wills drawn that say to pay all expenses and taxes and transfer assets first to the surviving spouse, and then to the children. For the most part that will take care of the problem; however, if it is a second marriage or a common law relationship and both parties have children from previous relationships, this simple will can leave the deceased’s children out of the estate.  Once the estate transfer is complete to the surviving spouse, it is the will of the surviving partner that will determine how the assets are distributed to the next generation. Of course good intention would suggest that all the children will be treated equally, however, that may not be the case. Fortunately our legal system allows for a solution.

The answer is a spousal trust.  A spousal trust can hold the assets for the benefit of the surviving spouse but at the death of the surviving spouse the trust will transfer the assets to the children of the deceased.

A trust is a legal entity that holds property on behalf of a beneficiary. It is set up by the asset-holder who is called the “settlor.” The trust has a trustee who administers the trust assets on behalf of the beneficiaries who will receive benefits according to the provisions of the trust.  A trust can be set up during the settlor’s lifetime; this is called an inter-vivos trust. Alternatively, the trust could be set up as a provision of the settlor’s will – this is called a testamentary trust. A testamentary trust does not exist until the death of the settlor.

For our purposes we will focus on testamentary spousal trusts.  A testamentary spousal trust is set up to provide a life income for the surviving spouse during his or her lifetime.  Upon the death of the surviving spouse, assets can then be transferred to the children or other named beneficiaries of the settlor.

For a trust to be valid there must be certainty of intent: the settlor must clearly define what he or she wishes to accomplish. There must also be a certainty of subject; the asset that will be transferred to the trust must be clearly defined, i.e. property, stocks, bonds, mutual funds. Lastly there must be certainty of object i.e. the beneficiaries of the trust must be clearly defined.

By making a very simple change to the will to allow for the creation of a testamentary spousal trust, specific assets can be made available to the surviving spouse during his/her lifetime but the asset will ultimately transfer to the heirs of the deceased spouse (settlor) at the second death.

A spousal trust is an inexpensive way to make sure that the wishes are carried out.  Setting up a testamentary trust is a bit more complicated than a simple will and getting good legal advice is essential.

– Colin J. Campbell, CFP, CLU, Ch.F.C., Guidance Planning Strategies – Cranbrook

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