2016-0634891C6 2016 STEP - Q3- Estate beneficiary of IV Trust

Principal Issues: Where an inter vivos trust is a life insurance policyholder and the estate is the beneficiary of the trust, would the estate be a GRE if the estate received property as beneficiary?

Position: No

Reasons: Property would not be received from "an individual on or after the individuals' death and as a consequence thereof" and therefore definition of GRE not met.

Author: Holloway, Lena
Section: 248(1); 108(1)

STEP CRA Roundtable – June 10, 2016

Question 3. Distribution from Inter vivos Trust to Graduated Rate Estate

Inter vivos trusts may be created with one of the beneficiaries being an individual’s estate.  A life insurance policy, for example, might be held by such a trust with the trust being the beneficiary of the policy at death and the estate being the beneficiary of the trust.

Does such an arrangement, once a payment is made, disqualify the estate from being a testamentary trust and thus a graduated rate estate?

CRA Response

The definition of a “graduated rate estate” in subsection 248(1) specifies that the estate must be “at that time a testamentary trust”.  The definition of testamentary trust in subsection 108(1) requires that (for trusts created after 1981) no “property has been contributed to the trust otherwise than by an individual on or after the individual's death and as a consequence thereof.”

At the 2008 STEP Conference, in our response to Question 2 we said:

“a trust created pursuant to the individual's will or other testamentary instrument will not lose its testamentary trust status solely by reason of the receipt of the proceeds of an insurance policy on the life of that individual (who was the policyholder), where the trust is the designated beneficiary under the policy and the trust was not created or settled before the death of the individual.”

In the case presented above the individual whose life is insured is not the policyholder, but rather it is the inter vivos trust that is the policyholder.  Any property contributed to the estate as a beneficiary of the inter vivos trust would not meet the requirement that the property be contributed to the estate “by an individual on or after the individual’s death and as a consequence thereof.”  Hence in such a scenario the estate would not meet the definition of a graduated rate estate.

2016-063489
Lena Holloway

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