Spousal trusts seemed more common in the past than they are today. Generally, they were used to ensure your spouse could have adequate income from the farm assets you left behind, but they limited the control of these assets so they would pass to the next generation.
We have heard horror stories of re-marriage situations in which the new spouse’s children end up with farm assets versus your own children. Obviously, this is not typically one’s intent but these scenarios can happen. This is one example of when a spousal trust may be used to protect your assets from a second marriage and to ensure your children are protected.
There is another benefit of spousal trusts that can make it an appropriate tool for your estate planning. A spousal trust can help ensure your farmland stays onside for family farm rollover rules after you have passed away.
From a high level, the Income Tax Act allows for land that has been principally farmed by you, your spouse, your parent or your child, to roll tax deferred to the next generation. However, there are scenarios in which your land would no longer be considered to be principally farmed. If the land is rented out to an arm’s-length neighbour for more years than an individual listed above farmed it, it would no longer qualify.
It is a huge tax advantage to stay onside of these rules. For example, if you had land with an increased value of $1 million today, by qualifying for these rules you could defer about $240,000 in tax (depending on your province of residence).
How can a spousal trust help?
A spousal trust may give your spouse the ability to rent the land out for many years and not have to worry about creating this huge tax liability.
Let’s look at an example:
Joe is 50 years old and planning his estate. Joe’s spouse and children are not involved in the farm. He has farmed one of his quarters for only 10 years. He has a severe illness and likely will pass away soon. At this time, his family will cash rent out the land to an unrelated party.
Joe could pass the land to his wife in his estate tax deferred. However, as soon as she has rented the land out for more than 10 years (the number of years he farmed the land) it will no longer qualify for the family farm rollover rules.
Instead, Joe has his will put this into a spousal trust for his wife with the land going to their children when she passes away. This allows her to rent the land out for the next 30 years in the spousal trust and the land can still roll to their children, tax deferred when she passes away.
This allows Joe’s wife to have a simple cash rent agreement with their neighbour and still stay onside of the family farm rollover rules.
However, a disadvantage of this is it could restrict his wife from making decisions, such as selling the land.
Ensuring you stay onside of the family farm rollover rules and setting up a spousal trust correctly is important. Be sure to talk to a tax professional, and your lawyer to ensure you meet these rules with your estate plan.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.