Where both spouses (or common partners) are potentially exposed to creditors (i.e. where they are professionals or partners in a business), it may be appropriate for them to transfer the principal residence to an inter vivos discretionary trust. An inter vivos trust is one that is created during your lifetime. A discretionary trust is a trust where the beneficiaries’ entitlements to the trust fund are not fixed, but are determined by the trustees of the trust.
Creditor Protection, Centralized Management and Multiple Beneficiaries
The trust can be structured to govern who is entitled to benefit from the property, how it is managed and what to do if the trustees can’t agree.
The trustees of the trust are one or more individuals who have the power to make certain decisions, and the beneficiaries can include not only the trustees, but also children, grandchildren or other relatives. An advantage to a discretionary trust is that none of the beneficiaries have any vested right to the property – they will only be entitled to use the property as the trustees allow and/or when the trustees decide to distribute the property to them. If a beneficiary experiences creditor issues, they will have a strong argument that they have no interest in the property, and that it therefore should not be subject to seizure.
Probate Fee Avoidance
The property in the trust will not be subject to probate fees, currently approximately 1.4% of the gross value of the estate (and subject to being increased by the acting Provincial government of the day).
Retention of Primary Residence Capital Gains Exemption
The Income Tax Act allows a home owned by a “personal trust” to qualify as a principal residence if the property was ordinarily inhabited in the calendar year ending in the relevant fiscal year of the trust by an individual beneficiary of the trust or a child, spouse or former spouse of such a beneficiary.
Note: Property Transfer Tax Issue
For a primary residence, a transfer of legal ownership from you to the Trust in the Land Title Office will not incur any capital gains taxes but it will trigger property transfer taxes under the BC Property Transfer Tax Act (1% of the first 200,000 and 2% of the balance).
There is a way to work around this issue where legal title to the property will continue to be held by you as bare trustee on behalf of yourself as trustee of the Trust for the benefit of the beneficiaries of the Trust. The mechanisms to effect this transfer are an Agency Agreement, a Bare Trust Agreement, a Transfer of Beneficial Interest and a duly executed Form A Transfer. Legal title to your property in the name of the Trust will not be registered unless there was a potential creditor concern or you passed away and the property transfer taxes will be payable at that time by the trust. It is important to note that while this strategy will avoid the payment of property transfer taxes at this time, there is a risk that a creditor could register a judgment against the property against you as bare trustee in the interim. That said, there is a large amount of unregistered trust property in existence and you may be prepared to accept this risk.