- A spousal trust is used so a surviving spouse can benefit from property while it is kept for others, such as children from a prior relationship.
- Without a plan, the BC intestacy rules split an estate between a spouse and descendants in set shares.
- Tax treatment depends on the type of trust, so an accountant should confirm how the trust will be taxed.
In a second marriage, you may want your spouse looked after while making sure children from an earlier relationship are not left out. These aims can pull in different directions.
A spousal trust is one way families try to balance them. This article explains the idea in plain words, the tax points that matter, and what to ask a lawyer and accountant.
This article covers the law of British Columbia.
How a spousal trust works
In general terms, a spousal trust holds property for the surviving spouse's benefit, and the trust terms say who receives what is left afterward. A trustee manages the property in the meantime.
The point is to separate use from ownership. The spouse has support, and the children's later share is set out in the trust rather than left to chance.
What happens without one
If there is no valid plan, BC intestacy rules apply. With a spouse and no descendants, the whole intestate estate goes to the spouse. With a spouse and descendants, the spouse takes household furnishings plus a preferential share of $300,000 if all descendants are common to both, or $150,000 if not. The residue is split half to the spouse and half to the descendants.
A court may also order provision from the estate for a spouse or child not adequately provided for by a will. A wills variation claim must start within 180 days after the grant is issued in BC.
Tax points to understand
A testamentary trust is generally created on and as a result of an individual's death. An inter vivos trust is any trust that is not testamentary. An estate qualifies as a graduated rate estate only for up to 36 months after death, and must designate itself on its first T3 return.
Related trusts for older settlors work differently. An alter ego trust is created after 1999 by a settlor aged 65 or older, who must receive all trust income during their lifetime. A joint spousal or common-law partner trust is created after 1999 by a settlor aged 65 or older, with the settlor and their partner receiving all income until the later of their deaths. For these, the deemed disposition day is the death of the settlor, or the later death of the settlor and partner, not the 21-year anniversary, so tax on accrued gains is deferred to that death.
Other trusts are deemed to dispose of most capital property at fair market value on the day 21 years after certain starting dates. Whether a tax rollover is available on the transfer into a particular trust depends on the facts, and an accountant should confirm it.
The trustee and the surviving spouse
- A trustee may invest as a prudent investor might, but not in a manner inconsistent with the trust.
- The trustee must use the care, skill, diligence and judgment of a prudent investor.
- A beneficiary may give notice requiring the trustee to pass accounts annually.
- The T3 return is due no later than 90 days after the trust's tax year-end.
Where the spouse is also living in the family home, BC law has separate rules. A surviving spouse may acquire the spousal home from the personal representative, by written notice, within 180 days after the grant is issued unless the court extends the period. The court may also order the spouse to keep the home and convert the descendants' interest into a registrable charge.
What to do next
- List the people you want to protect and what each should receive.
- Think about who could act as trustee fairly when the spouse and children have different interests.
- Ask a lawyer how a trust would fit with your existing documents and the BC rules above.
- Ask an accountant how the trust would be taxed and what returns it would file.
Frequently asked questions
Does a spousal trust stop my children from challenging the plan?
Not necessarily. A court may order provision for a spouse or child not adequately provided for by a will, and the claim must start within 180 days after the grant is issued in BC.
Who counts as a spouse in BC?
For estates law, spouses are married persons, or persons who lived in a marriage-like relationship for at least 2 years. Family law has its own definition.
Is the tax on the property deferred?
For alter ego and joint partner trusts, tax on accrued gains is deferred to the relevant death. For other arrangements it depends on the facts, so ask an accountant.
Does the trustee have to give accounts?
On notice from a beneficiary, a trustee must pass accounts annually. Executors and testamentary trustees must also generally pass first accounts within 2 years, unless all beneficiaries approve in writing or the court directs otherwise.
Sources
- Trustee Act, BC Laws — bclaws.gov.bc.ca
- CRA – Types of trusts — canada.ca
- Income Tax Act s. 104 — Justice Laws (federal)
- CRA – When to file a trust's T3 return — canada.ca
- Wills, Estates and Succession Act, BC Laws — bclaws.gov.bc.ca
- Family Law Act, BC Laws — bclaws.gov.bc.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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