Tax for Estate Planners: Estate Variation vs. Estate Resettlement

In my previous note I wrote about circumstances where a beneficiary alters the terms of an estate by disclaimer.

This is a brief companion piece, focusing on estate variations and the potentially disastrous tax consequences if a variation is considered a resettlement of the estate.

Variation

It’s a common scenario: an executor or beneficiary wants some change to the terms of a will. As noted previously, this can be achieved through a disclaimer of the beneficiary’s interest. Another method, however, is to vary the terms of the will.

Variations can proceed via court order or, more typically, under a deed of arrangement or similar instrument, where all beneficiaries sign off on the alteration.

Tax treatment of variations depends on their scope. Specifically, the key question is whether the variation “undermines the entire substratum of the trust”.

Resettlement

If the variation rises to the level such that it undermines the substratum of the trust, the CRA considers there to be a resettlement of the trust, and thus a disposition of all trust assets at fair market value—potentially with dramatic tax consequences.

According to the CRA, a resettlement does not occur if the variation aligns with the settlor’s original intent and preserves the overall distributive effect of the instrument. Anything else, in their view, will cause a resettlement of the trust or estate.

Case law offers some nuance. A variation exhibiting “broadly the map of the testator’s minds as reflected in their wills” will constitute a variation and not a resettlement. The distinction in many of these cases is between the detail of the instrument vs. its substance:

• Cases involve the enlargement, acceleration and partial extinguishment of interests—all of which the courts agree preserve the substratum of the trust.

• The substratum will not be undermined where the substance of a trust remains. On the other hand, detail or machinery of distribution may be altered.

• Generally speaking, the cases where variations are denied are where there was found to be no relation between the pre- and post-arrangement trusts, and where specific intent of the settlor was found on the question of the variation—and this intent was circumvented.

Intent

When advising clients on altering the terms of a will, the starting point is the settlor’s intent. If the modification aligns with that intent, it should not trigger tax consequences.

This, necessarily, depends on the circumstances. For example, allowing in-kind distributions where they were previously prohibited differs from removing a beneficiary entirely—though, depending on the facts, an argument could even be made for the latter.

Happy to discuss this, or any other tax or trust-related questions. I can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123.