The family home is often one of the key family assets. It can be the object of friction among family members, and be subject to tax on sale or death, unless proper planning is implemented. A trust can be used to address these issues and minimize risk of loss.
Preserve your assets with a principal residence trust
Clients often ask me, “How can I best protect and preserve my assets, such as the family home, for my heirs?”
I recently advised a couple before their upcoming second marriage, who wished to discuss what legacies they wanted to leave to the children they each had from previous marriages.
I suggested they each get independent legal advice (“ILA”), but they insisted on being advised together, so I had them sign an acknowledgment and waiver of ILA.
They were both contributing to the purchase of a new home, and wanted to ensure that on death the one-half contribution of each went to the children of the first marriage of each.
I recommended that they establish a Principal Residence Trust (“Residence Trust”) to hold the new home. As they were to settle the Residence Trust on themselves as trustees, for the benefit of themselves and the respective heirs of their estates, a simple change in legal title would be registered.
I explained that the Residence Trust would preserve the availability of the Principal Residence Exemption from future capital gains that may be realized on the disposition of the home, under the Income Tax Act (Canada) (“ITA”). On the death of either of them, the Residence Trust would continue to own the home, so no probate tax would be payable on the value of the home. On the purchase of this Cdn$2 million home, the probate tax in Ontario would otherwise be about Cdn$30,000.
On the death of the first spouse, the surviving spouse would have the power to deal with the assets of the Residence Trust in his/her discretion, but preserving those assets for the beneficiaries of the Residence Trust. After the death of both spouses, the trustees would be empowered to deal with the matrimonial home in accordance with their respective wills.
I pointed out that the ITA’s definition of a Principal Residence allows for a trust to own the home and, on disposition, designate specific family members who have been beneficiaries of the Residence Trust and have ordinarily inhabited the home. In the case where this home is the only one claimed by the designated individual as his/her principal residence for each particular year of ownership, the trust may claim the Principal Residence Exemption.