If you set up a trust as part of your estate plan, one date you don’t want to forget is the 21st anniversary of the trust. This is because in most cases, a trust is deemed to dispose of its assets for fair market value on the 21st anniversary of the creation of the trust, and every 21 years thereafter (there are some modifications to the rule for certain trusts such as spousal trusts, alter-ego trusts and joint partner trusts). If the 21st anniversary of the trust passes without proper planning, the trust may have a significant tax liability with respect to assets that have increased in value in the 21 year period. There are ways to reduce the impact of this deeming rule, but the appropriate strategy will depend on a number of factors, including:
- Nature of trust property. The impact of the deemed disposition rule will depend on the nature of the property held in the trust. Not all assets are subject to the deemed disposition rule, and some assets (for example, shares of a private company) may require more complex planning.
- Value of Assets. If the assets subject to the deemed disposition rule have little value, or have not significantly increased in value since they were purchased, the tax consequences of the deemed disposition will be minimal.
- Beneficiaries of the Trust. In some cases, it may be possible to avoid the deemed disposition by distributing trust assets to beneficiaries prior to the 21st anniversary. Subject to some exceptions, this can be done on a tax-deferred basis if the beneficiaries are resident in Canada. In cases where it’s not appropriate to distribute assets to beneficiaries (due to their age, health, or other reasons), or if all beneficiaries are living outside of Canada, planning around the deemed disposition rule may be more challenging.
- Purpose of the Trust. If the trust was created for a purpose that is no longer relevant, it may make sense to avoid the deemed disposition rule by distributing the trust property and terminating the trust prior to the 21st anniversary. In other cases, a distribution of trust property or termination of the trust may be inconsistent with estate planning objectives.
- Terms of the Trust. Some trust deeds may not be flexible enough to accommodate the required planning. In these situations, it may be necessary to consider amending or varying the terms of the trust in addition to any planning that is done in connection with the deemed disposition rule. There are various ways to effect a variation depending on the circumstances, some of which require a court application. Any tax consequences of the variation itself must also be considered.
It’s important to begin planning well in advance of the trust’s 21st anniversary as it may take time to implement the appropriate strategy.