Effective Estate Planning for the Effect of Mobility

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January 24, 2010
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Effective Estate Planning for the Effect of Mobility

This article will focus on what to consider when your beneficiaries, (the parties who you will leave your estate to), and your executor or personal representative (PR), the person who manages the estate process once you die, live outside of Alberta.

There are various reasons behind a person’s choice for a PR living outside of Alberta.  There are several considerations to estate administration as a result.

First, the Court may require the PR to post a bond, when making the application for Probate.  The bond is an insurance policy purchased by the estate to ensure the out of province PR properly administers the Alberta estate.  As the Alberta Court cannot sanction a PR living outside Alberta, the bond provides protection to the beneficiaries if the PR removes the estate assets from Alberta, and fails to properly distribute those assets to the beneficiaries.

The second consideration of a PR’s residence relates to trusts inside an estate.  A trust, by definition, occurs where a person (through their Will, for example), leaves assets, which will be managed by someone (the PR) for the benefit of someone else (the beneficiary).  A trust can occur in a Will where you leave assets for your children who are under the age of 18.  Minor children are not able to receive money from your estate.  In that case, the PR manages and invests the funds for these children, and pays out the balance owing to them when they reach a certain age.  In Medicine Hat and elsewhere in Alberta, it can be as early as age 18 but can include ages 25 (and older).

Now, if your PR in British Columbia, the trust will live there too.  What that means is that for tax purposes, income earned by the trust assets in the estate will be taxed at B.C. tax rates.   If you don’t like paying higher taxes, you want your trust to live in Alberta.  Both B.C. and Saskatchewan have higher income tax, capital gains tax and dividend tax rates than Alberta.   In some cases, people from British Columbia and Ontario have set up their estate plans so that their trusts live in Alberta.

Lawyers in Medicine Hat have addressed this issue by having their clients name an Alberta PR in addition to the foreign PR.  The inclusion of the Alberta PR has kept the residence of the trust in Alberta, so long as the control over the estate rests with the Alberta PR.

Trusts have purposely been set up in foreign locations for tax reduction (or avoidance). The case of Garron Family Trust v. Her Majesty the Queen marked the initial move of the Canadian government to challenge the validity of the foreign trusts.  The Garron case related to a family trust (not an estate) set up in Bermuda, a tax haven location.  The Canadian tax court said the location of the central management and control of the trust indicates the trust’s residence; not simply whether there is a Canada connection.

This decision may have implications for estate planning in Alberta where you have an Alberta PR for appearance’s sake, but the foreign PR has all the power and makes the major decisions. If you have PRs from Alberta and elsewhere, you should consider the implications of who will be making the major decisions for the trust.

If your estate includes a beneficiary living outside of Canada, your estate planning and estate administration also becomes more challenging, due to increased income tax implications. Including your accountant at the estate planning phase can help you better address these tax issues.

As people become more mobile, the residence of your PR and beneficiaries can change from the last time you looked at your estate plan.  Keeping your lawyer and accountant informed of these changes helps to ensure that your estate plan will work as planned.

Les Scholly
Les Scholly helps you navigate the turning points of life. He is a partner with Pritchard & Co. Law Firm, LLP and member of the Society of Trust and Estate Practitioners (STEP). Contact Les at 403-527-4411 or at lscholly@pritchardandco.com