Recently I have been asked a few times if putting real estate into a trust for family members is a good idea. It is understandable why people are asking this especially when in Vancouver and Toronto, families are often property rich or cash poor due to the inflated values of real estate. Beyond a deeper financial planning discussion, whether one should hold onto real estate or sell it and turn it into cash to be used to support family members with a disability, is very dependent on your desired outcome.
The province does allow for an individual to own a home or mortgage exempt from the asset test for eligibility to persons with disability benefits (PWD) so owning a residence in itself should not be a concern for losing access to PWD. Where it may be of issue is for control and/or estate tax liabilities.
Regarding control issues, some individuals with disabilities cannot make sound, complex, financial decisions based on their mental capabilities. The BC Credit and Consumer Branch allows for contracts signed by adults that the vendor thought to be of sound mind to be valid in terms of collections of debt. This creates a concern in that if a person with disabilities owns a property and is in debt, potentially the asset may be attacked by creditors. This control concern is a valid reason to consider placing a real estate property into trust for the benefit of the family member with disabilities.
In terms of tax liabilities, only those assets not in the estate of a deceased or that have a designated beneficiary as determined by the law, can escape estate taxation like probate fees. Given the high value of property, these taxes can amount to a sizable dollar figure. Placing a property into a bare trust for real estate, solely for the benefit of the person residing in it, can help to bypass taxation because it is out of the estate and still a primary residence; however, in practice we have found that there are discrepancies in terms of tax jurisdictions’ interpretation of the law like when property tax should be eligible for a property tax grant in the bare trust, Municipalities have sometimes denied the grant because the property was owned by a trust.
Keep in mind, no matter what your reasons for putting real estate in trusts, there are costs to setting this up, dismantling it and filing tax returns on a regular basis so the trouble and expense should outweigh the concern you are trying to by-pass.
Often times, it turns out that it is simpler to just liquidate the real estate, place the assets in trust and then rent a property for the remainder of your loved ones’ years of life.
If this sounds complicated – it is. Like most situations, you are better off to seek professional financial and estate planning advice when deciding on the strategy to use for your real estate.
By David Chen BSc, BA, CPCA, CFP ® Lead planner, DC Complete Financial
Note: These opinions are of David Chen’s and not necessarily a DDA endorsement.