One of the key pillars to estate planning is preservation of wealth by keeping assets away from one’s creditors throughout one’s lifetime. Often, it is the principal residence that is considered a person’s most valuable asset and within reach of creditors in order to satisfy their claims.
I recently met with my client Roy and Julie, respectively a financial advisor and attorney, who expressed to me their desire to plan ahead and transfer their home into a trust in order to protect it from future creditors that they may be exposed to though their line of work. Although Roy and Julie have no current creditors or pending lawsuits against them and each have extensive professional liability insurance policies, they felt that there was an opportunity to take additional preventative measures to protect their assets in the event that a claim exceeded his or her insurance coverage or if a claim was simply not covered by their insurance.
Roy and Julie jointly own their home and acquired it after they were married under the matrimonial regime of separation as to property. Today the home is mortgage free and has a fair market value of approximately $1,000,000.
Although asset protection was Roy and Julie’s primary objective, it was important for them that they maintain all of their family patrimony rights with respect to the home once transferred into the trust and that the principal residence exemption which currently applied to the home would be maintained upon its eventual sale at a future time.
With respect to Roy and Julie’s primary objective, an inter vivos trust or more specifically in this case, a principal residence trust (hereinafter the “PR Trust”), is an effective creditor protection strategy as the title to their home would vest within the PR Trust’s distinct patrimony and consequently remove it from their common pledge of creditors. I advised Roy and Julie that in order to further strengthen such creditor protection and avoid creditors from “piercing” the PR Trust by forcing the trustees to distribute the assets in satisfaction of a claim, no property could be able to be distributed to its beneficiaries (Roy, Julie and their children) should Roy or Julie become insolvent or should a lawsuit be filed against either of them. However, most importantly in order for this strategy to be effective, the home must be transferred into the PR Trust before any difficulty with creditors arises. Notwithstanding the proven success of the PR Trust to protect assets from creditors, I cautioned Roy and Julie that the jurisprudence continues to expose new fact patterns when assets in a PR Trust may be attacked and that no creditor protection strategy is guaranteed in all circumstances.
With respect to Roy and Julie’s family patrimony rights to the home once it is held in the PR Trust, there appears to be differing judgments rendered on whether the home remains part for the family patrimony after the transfer. Despite this gray area in the law, it is recommended to include a clause in the trust that states in precise terms Roy and Julie’s intent that the home remains part of the family patrimony. As such, Roy and Julie must continue to use the home as a family residence.
I explained to Roy and Julie that one of the great advantages of the PR Trust is that although title to their home would no longer be in their name, the principal residence exemption would continue to apply upon the disposition of their home by the PR Trust provided the following conditions are met:
- 1) That the trust file form T1079 entitled Designation of a Property as a Principal Residence by a Personal Trust in order to designate the home as its principal residence for one or more taxation years;
- 2)That in the taxation year(s) provided in form T1079, the home was ordinarily inhabited by a “Specified Beneficiary” who is defined as:
- a. A beneficiary named in the trust agreement that occupied the home; or
- b. The spouse, common-law partner, former spouse or common-law partner or child of a beneficiary named in the trust agreement that occupied the home.
- a. A beneficiary named in the trust agreement that occupied the home; or
- 3) That no corporation was named as a beneficiary in the PR Trust;
- 4) That in the taxation year(s) provided in form T1079, no other principal residence was declared by any Specified Beneficiary or any person who was a member of such Specified Beneficiary’s “Family Unit”, which includes his or her spouse, common-law partner or minor child.
Although further discussion and careful consideration must still be made by Roy and Julie on who would act as trustee(s) of the PR Trust, who would be its beneficiaries, what would happen to the home upon both or either of their deaths, and if they plan on refinancing their home in the future (which is difficult to obtain for property held in trusts), the PR Trust appeared as a viable strategy for Roy and Julie to consider in order to meet their objectives and provide them with the creditor protection that they sought. If you wish to discuss this topic in further detail, do not hesitate to contact me at 514-832-5197.
