Today, I want to talk about lifetime benefit trusts, which can be a tax benefit for those families with mentally infirm members.
THE RULES
Picture this. You're the proud owner of a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). When you pass away, you're hoping to provide for a mentally infirm spouse, child or grandchild, and your RRSP or RRIF dollars could be a big help to them.
Now, at the time of your death, a tax bill is due on the full fair market value of your RRSP or RRIF. The result? The taxman could end up with nearly half of those assets. Ouch. There are a few exceptions to this rule. Specifically, when you leave your RRSP or RRIF assets to your spouse, or a financially dependent child or grandchild, it may be possible to defer the tax on those plan assets until that surviving beneficiary makes withdrawals of those assets.
As a practical matter, you can name your spouse or a financially dependent child or grandchild as the beneficiary of those registered plan assets in your will. If you leave a certain portion of your estate to this person but you fail to leave the RRSP or RRIF assets to him or her, it may be possible for your executor and the beneficiary to make an election to deem the RRSP or RRIF assets to have been received by them, in which case there should still be a tax-deferred rollover of your RRSP or RRIF assets to that family member.
This tax-deferred rollover is available to any spouse, or financially dependent child or grandchild - including those who are mentally infirm. What does "financially dependent" mean? Well, if the dependant's income for the preceding year was more than the basic personal amount ($9,600 in 2008), he's presumed not to be financially dependent on you. In the case of a mentally or physically infirm dependant, the amount can be increased by adding the disability tax credit amount ($7,020 in 2008) to total $16,620 in 2008. THE PROBLEM
Suppose you have a mentally infirm family member who is eligible to receive your RRSP or RRIF assets by a tax-deferred rollover. You'll avoid tax on those assets on your death. Great so far. But there can be legal difficulties with a mentally infirm person setting up, administering, maintaining and bequeathing RRSP or RRIF assets.
THE SOLUTION
A new "lifetime benefit trust" (LBT) has been introduced (and reintroduced in Bill C-10 in 2007) that will help in this situation. The LBT is a personal trust that can be set up in your will where you can leave your RRSP or RRIF assets to the LBT for the benefit of your mentally infirm dependant.
The terms of the LBT are such that the beneficiary must be mentally infirm, and financially dependent on you at the time of your death. This dependant must be the sole beneficiary of the LBT, and can receive income or capital (that is, the principal amount in the trust) at the discretion of the trustees, who you name. The trustees don't have to pay out all the income to the beneficiary, but they are required to consider the needs of the beneficiary, including his or her comfort, care, and maintenance.
The LBT must then purchase a "qualifying trust annuity" (QTA) with the RRSP or RRIF proceeds, and the LBT will receive the annuity payments as the annuitant. The QTA must be for the life of the infirm beneficiary, or for a fixed term equal to 90 years minus the age of the infirm beneficiary. Any amounts paid out of the LBT to the beneficiary will be taxable to the beneficiary. The fair market value of the annuity at the time of the beneficiary's death will be taxable to the beneficiary upon his or her death.
Finally, any amount remaining in the LBT after the death of the infirm dependant is potentially available to other beneficiaries named in the LBT.
Tim Cestnick