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Silvana is wondering if a trust for her home could save taxes or help with estate planning. Here’s what she needs to know before deciding.
Despite this crazy market, I was able to sell my house. The price was on the lower side but still able to make some profit that could allow me to live more comfortably.
I am now in the process of looking for a much smaller house, and wonder if you could give me some guidance on how to buy it under a “Trust”, and not under my own name. I would like to minimize the tax implications from the Estate in the event that something happens to me and my kids get stuck with taxes.
—Silvana
Congratulations on your home sale, Silvana. A downsize can help supplement a retiree’s savings. Your question about using a trust to buy a new home is not a simple yes or no answer.
A trust is a legal arrangement where a person called the settlor transfers assets to a trustee to manage for beneficiaries, based on pre-determined rules. The assets are typically investments, real estate, or a business.
There are two main types of trusts: an “inter vivos” (living) trust, created while the settlor is alive, and a “testamentary” trust, which is written into a will, which takes effect after death.
Related reading: The difference between wills and living trusts
Trusts can have an income tax motivation, an estate planning benefit, or a practical use to hold assets for a vulnerable beneficiary. That vulnerability could be that the beneficiary is too young, like a minor child, or unable to manage the assets themselves, like someone with an intellectual disability or other impairment. Trusts are also sometimes used to maintain privacy.
The most common trust use case never comes to fruition. People with minor children commonly have wills that include testamentary trusts if they die before their kids attain the age of majority. But since most parents do not die while their kids are young, these trusts are never funded.
Another common use is for business owners who might sell their business someday. A trust can own shares of their company with family members, including minor children, as beneficiaries. In this way, when the trust sells shares of the company in the future, the trust can allocate the capital gain to multiple people. If the shares qualify for the lifetime capital gains exemption, a trust can multiply the exemptions available rather than having a capital gain taxable to the business owner alone.
Speaking of capital gains, in the context of your question, Silvana, it is important to consider what happens to your principal residence when you die.
The principal residence exemption (PRE) allows a taxpayer to claim a tax-free sale for a home that qualifies. You must have ordinarily lived in it during the years you want to claim the exemption. You can only designate one property as your principal residence for each year. However, it can apply to houses, condos, cottages, and similar vacation homes, so does not necessarily need to be the home you primarily live in, nor does it need to be the property where your mail goes.
Deadlines, tax tips and more
When someone dies, they are deemed to sell their assets. One exception is if they leave assets to their spouse or common-law partner, in which case, they can generally roll over tax-free or tax-deferred, depending on the asset.
So, if you do not have a spouse or common-law partner, when you die, your executor can claim the principal residence exemption for your home so that no tax results, assuming the property qualifies.
As such, a trust will probably not save you any income tax for your principal residence, Silvana.
A trust may save you probate fees or estate administration tax though. This varies by province or territory. These costs are payable to validate a will and permit the executor to distribute assets to the beneficiaries.
The lowest probate fees are found in Manitoba and Québec, where there are no probate fees for most estates. Alberta also has relatively low fees, with a flat maximum of just $525 for estates over $250,000.
Ontario charges $14,250 on a $1 million estate (1.5% on the value over $50,000). For a $1 million estate in British Columbia, it would be $13,450 (1.4% on amounts over $50,000, plus a small fee on the first $50,000).
The wide range in fees means that where you live can have a significant impact on the cost of settling an estate subject to probate. Residents in high-fee jurisdictions may be more motivated to mitigate probate fees.
A trust does not die when you do. So, a trust can be written to distribute assets, like your home, when you pass away. This would not form part of your estate, and would therefore avoid probate.
In your case, Silvana, my concern is that you might only be trying to save, say, $15,000 on a $1 million estate, depending where you live. The legal fees to set up a trust might be $5,000 or more, and the going accounting costs to file a T3 Trust and Information Return and prepare annual trust minutes could be $1,000 to $2,000 annually, such that costs could easily eclipse the potential savings.
Trusts have a place, but there may not be a compelling reason to consider one for your principal residence unless the value is quite significant and you live in a high-probate province or territory. Personalized advice is important when complex tax and estate matters are at play.
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