Is Your Trust Valid?
Trusts have become very popular over the last 20 years. Many families have established trusts to take advantage of income splitting or multiplying the $750,000 lifetime capital gains deduction so that each member of the family can take advantage of it. Living trusts, alter ego trusts and joint spousal or common-law partner trusts are also very popular, often used to avoid probate fees or a challenge of a will by disappointed beneficiaries.
The problem is that as trust usage has become more popular, some of the unique rules that apply to trusts have been overlooked. If a trust is not set up properly, it may not be a valid trust. If that happens, and the trust is challenged by the Canada Revenue Agency (CRA), all of the tax benefits for the life of the trust may be lost resulting in a large tax bill (plus interest).
It is absolutely essential that your trust be set up properly. Otherwise, it is not worth the paper it is written on.
One of the biggest problems with trusts is that they are often not “settled” properly. I have seen many situations where the client has a signed Trust Agreement or Trust Deed which appears to be fine. But the proper procedures to establish or “settle” the trust were not followed. In those circumstances, there is usually nothing that can be done to fix the trust. So everything the trust purported to do since it was established is void.
Under trust law, for a trust to be validly created, the 3 certainties must be proven. In simple terms, you must be able to prove that:
1. There was intention by the settlor to create the trust.
2. The beneficiaries of the trust are clear.
3. There must be clearly identified property which is transferred by the settlor to the trustee to establish the trust.
Items 1 and 3 above are the frequent problem. It is clear from the decisions of the Courts, that simply saying that all these things have occurred in the written trust document is not sufficient. It is also open to the Court to examine the actions of the parties.
For example, what if the trust document says that the settlor intended to establish the trust, but the settlor’s actions indicate otherwise. This occurred in the Antle decision of the Tax Court (affirmed by the Federal Court of Appeal). In that case, the Court found that Mr. Antle didn’t have the necessary intention to establish a trust. In fact the proper procedures weren’t followed and as a result, the Court decided that the trust was not valid.
There are many very technical steps that must be followed for a trust to be valid. Sometimes there is a temptation to cut corners and this puts the trust at risk.
For example, often a family trust needs a settlor who is not a trustee or a beneficiary. So the family will be forced to find a “friendly” settlor such as a relative or friend or professional advisor to establish the trust. Often this is done as a favour for the family, so the family will try to minimize the cost and hassles for the settlor. This can often backfire and jeopardize the validity of the trust.
Often the friendly settlor will sign the trust documents without really knowing what they are signing. Ask yourself what this person would say many years later if asked under oath if they knew what they were doing. Would the answers satisfy the Court that the settlor had enough understanding to conclude that the settlor had the necessary intent? Would you want to put the settlor through this kind of ordeal?
The settlor also has to transfer some identified item of property to the trust to validly establish the trust. There are many problems with this. For example, is it clear what was transferred (for example, it is common to use a gold or silver coin to establish a trust)? Was it clearly identified in the trust documentation? Was it transferred into the names of the trustees? Can you prove it? If it was a gold or silver coin, can it be located?
Can the settlor prove he or she owned the item of property? If it was purchased, did the settlor pay for it? Is there a receipt? Is there proof of payment by the settlor? Or has someone else paid for it or has someone else reimbursed the settlor for the purchase.
An additional problem is the dating of the documents. While many legal documents routinely have a date on them which is different than the date signed, it is much more of a problem with trusts. The trust document should reflect what actually happened and so it is important that the trust document be signed as the procedures to establish the trust occur.
This is reflected in the following comments from the comments of the Tax Court Judge (Miller) in the Antle decision:
“This conclusion emphasizes how important it is, in implementing strategies with no purpose other than avoidance of tax, that meticulous and scrupulous regard be had to timing and execution. Backdating of documents, fuzzy intentions, lack of transfer documents… all frankly miss the mark – by a long shot. They leave the impression of elaborate window dressing. In short, if you are going to play the avoidance game, it is not enough to have brilliant strategy, you must have brilliant execution.”
Is your trust valid? Did it have brilliant execution, or was it really just elaborate window dressing?
 Paul Antle and Rene Marquis-Antle Spousal Trust v. Her Majesty the Queen 2009 TCC 465, affirmed by the Federal Court of Appeal in 2010 FCA 280 (leave to appeal to the Supreme Court of Canada denied).