Advocate Jan 2014

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28 VOL. 72 PART 1 JANUARY <strong>2014</strong> THE ADVOCATE TRANSFERS OUTSIDE A WILL Inter Vivos Transfers Asset transfers on an inter vivos basis are becoming more common as a result of the aging of the population. People in their 80s and 90s who become less active tend to relinquish properties and investments that they no longer wish to manage. 19 Those in their 60s and 70s are more likely to give up future growth only, a goal that can be achieved by an estate freeze. If the elderly wish to have their assets pass outside their wills but still retain control of their assets, alter ego trusts can be used. As a result of provisions 20 added to the Income Tax Act for the year 2000 on, alter ego trusts are now tax-effective instruments for seniors. Individuals aged 65 or older who do not want to give up control of their assets can transfer them to an alter ego trust on a tax-deferred “rollover” basis. On death, assets in the alter ego trust are distributed according to the trust document and do not pass through the settlor’s estate. 21 As people become elderly, they are likely to divest themselves of personal possessions on an inter vivos basis. A move by the elderly to a smaller residence necessitates the disposal of some furniture, and a subsequent move to a long-term-care facility usually results in the disposal of hearth and home, china, silver, crystal, paintings and books. Downsizing may even extend to personal effects such as jewellery and clothing. The wardrobe of the very frail may be a hospital gown on loan. “We brought nothing into this world, and it is certain we can carry nothing out.” 22 Intergenerational transfers on an inter vivos basis are becoming more common in our time not only because transferors are elderly but because transferees are adults. The adulthood of transferees is a relatively new phenomenon. In 1851, according to Statistics Canada, Canadian life expectancy was 43 years. That number seems implausible until it is remembered that in 1850 medical science was an infant in its cradle. Few scientific procedures or instruments of precision were yet available to aid in diagnosis. The stethoscope was still novel and the clinical thermometer had not yet been invented. The microscope was not available to medical students at Harvard until 1869–70, and even twenty years later the refresher courses at Johns Hopkins Medical School were filled with practicing physicians who had never seen a microscope. 23 In the 1800s, testamentary trusts for children were quite common because many children were too young to handle assets transferred to them directly by parents. Demographics are very different today. The average life span of Canadians is now approximately 80 years, so children are old
THE ADVOCATE VOL. 72 PART 1 JANUARY <strong>2014</strong> 29 enough and normally mature enough to handle assets transferred to them directly by elderly parents. Philanthropy on a large scale is now occurring on an inter vivos basis. Canadian universities and hospitals are receiving substantial gifts from living donors. The existence of dependants-relief legislation may be one factor that is prompting philanthropists to make donations during their lifetime rather than under a will. Inter vivos transfers are now a statutory requirement in some situations. Family law legislation generally calls for the division of family property on relationship breakdown. 24 Segregated Funds Canadian life insurance companies offer investment products which have become known as segregated funds because the investments are held separately from the general funds of the insurer. Investors place money in either a deferred annuity or a variable life insurance policy, and the money is used to purchase segregated fund units selected by the contract holder. Annuities are included in the statutory definition of “life insurance”, with the result that payouts on death to designated beneficiaries pass outside a will. A segregated fund contract and a will have little commonality, yet both effect transfers of wealth on death. A segregated fund contract is a “living document” that generates regular reports that disclose both the value of assets held and the names of beneficiaries to whom funds are to be distributed on death. A will, on the other hand, is a “dormant document” that does not generate periodic reminders of its existence. A segregated fund contract puts a floor under asset values by providing principal guarantees at death and at contract maturity dates. A will can only transfer whatever asset values exist at the time of death. Misappropriation by a third party does not occur under a segregated fund contract because, of course, there is no executor or other intermediary. Segregated fund contracts are particularly useful if confidentiality is desired, because a copy of a segregated fund contract is not circulated to beneficiaries on the death of the contract holder. Segregated fund contracts are also useful for long-term holdings because the 21-year deemed disposition rule applicable to trusts does not apply to segregated funds. Most changes to segregated fund contracts can be made by filing a change form, whereas changes to a will require a properly executed codicil. Payouts of segregated fund contracts are made promptly following the submission of a death certificate. Distributions under a will proceed at the pace of a snail or a tortoise.
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Because not everyone is this lucky.
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Advocate Jan 2014

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