Can I use a spousal trust to protect my new spouse and my children from a prior marriage in Ontario?

Yes. A spousal trust established by your will can be a powerful tool for balancing the competing interests of a surviving spouse and children from a prior relationship. The structure allows the surviving spouse to benefit from your assets during their lifetime, while ensuring those same assets eventually pass to your children.

Under a typical spousal trust, your estate (or a portion of it) is transferred to a trust on your death. The trust's income — and potentially some capital, depending on how you draft the terms — is paid to your surviving spouse for the rest of their life. When the spouse dies, the remaining trust assets are distributed to your children (or whichever final beneficiaries you name).

From a federal tax standpoint, a testamentary spousal trust can qualify for a tax-deferred rollover, meaning the assets pass into the trust at their adjusted cost base without triggering capital gains on your death. The gain is deferred until the assets are sold by the trust or until the spouse dies.

The key drafting issue is balancing the trustee's discretion. Giving the trustee power to pay capital to the surviving spouse provides flexibility for their needs, but it reduces what remains for the children. Setting the right parameters — what income means, what capital encroachments are allowed, and when — requires careful thought and precise legal drafting.