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Spousal Testamentary Trusts: Provide for a Spouse While Preserving Estate Intentions

The use of a testamentary spousal trust is an important estate planning consideration for those looking to provide security for a surviving spouse as well as any subsequent beneficiaries. Created through a will, a testamentary spousal trust is efficient in its ability to provide protection of family assets.

A spousal trust allows assets to rollover tax-free from a taxpayer into a trust for the benefit of a taxpayer’s spouse. In order to qualify as a spousal trust, the following terms must be present in the trust:

  • the spouse must be entitled to all the income of the trust; and
  • no one other than the spouse can benefit from the trust during the spouse's lifetime.

A spousal trust is normally set up in a will and is referred to as a spousal testamentary trust. Often, the surviving spouse is appointed as the trustee of a spousal trust. However, if there is a risk that the spouse will not be able to manage the capital in the trust, someone other than the spouse can be appointed as the trustee, and/or the spouse can be a co-trustee. As the trust will continue until the passing of the spouse, it is usually advisable to appoint a trustee that is the same age or younger than the spouse. Caution should be used in appointing trustees who are the ultimate beneficiaries of the trust. This could result in them restricting capital distributions to increase the capital in the trust from which they will benefit.

The main advantages of setting up a spousal trust are:

  1. Protect Capital
    Protection of Capital for a Spouse: if the spouse gets sued, there is a level of protection over these assets from claim. In the event of the spouse remarrying, the spousal trust provides protection of claims on marriage breakdown.
  2. Preserve Capital
    Preservation of Capital: there are often restrictions placed on the use of capital by the spouse so as to reduce the potential of depletion of the capital. Often a term is inserted in the trust that the spouse can utilize capital to the extent required to maintain their quality of life.
  3. Respect Wishes
    Ensuring that the Testator’s Wishes are Respected: the spousal trust may specify where the capital remaining in the spousal trust will flow on the surviving spouse’s passing. This is often relevant in a blended family situation, where there might be a risk that the surviving spouse might wish for the trust capital to go to his/her children versus the testator’s children.

A spousal trust is a useful planning tool that allows the capital of the deceased spouse to be used to generate an income for the surviving spouse (and capital when required) while providing a level of certainty that the assets will not be diverted to the family of a potential future spouse. This certainty is accomplished by the testator directing where the residual capital will flow on the death of the surviving spouse.

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Covenant Family Wealth Advisors' certified financial advisors and business succession planning experts help guide families through the technical and emotional aspects of managing wealth, estate planning and business succession. Our experienced financial management team uses a Christian perspective that is rarely found in traditional financial planning, and we work closely with you to develop a personal Holistic Stewardship Plan that encompasses financial planning, estate planning, family business transition and philanthropy.

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