The Lifetime Benefit Trust

By Brianna Mayes
December 16, 2019

When the annuitant of a registered plan (i.e. RRSP, RESP, TFSA, etc.) passes away, income tax regulations provide that the value of the plan must be included when calculating the deceased’s income for the year of death. An exception to this general principal would be the establishment of a lifetime benefit trust (“LBT”), pursuant to section 60.011 of the Income Tax Act.

A LBT is a personal, testamentary trust designed specifically for beneficiaries (spouse, child, or grandchild of the deceased individual) who are financially dependent and cognitively impaired. It offers a unique tax savings opportunity by filling the gap created when RRSPs or RRIFs are fully taxed at the highest rate upon transfer.

By establishing a LBT in their Will, a testator’s RRSP or RRIF assets can flow into the trust as a tax-free rollover. These funds are then used by the trustee to purchase a qualifying trust annuity (“QTA”). Once purchased, the QTA makes annuity payments to the trust rather than to the beneficiary of the trust because according to section 60.011 of the Income Tax Act, in a QTA, the trust is the annuitant and the financially dependent disabled child is the beneficiary. Therefore, the trustee can carefully measure the amounts paid out to the dependent beneficiary to protect their eligibility for government assistance by not going over the prescribed maximum amounts allowed by the government benefit programs. The QTA, which must meet certain conditions, can be an annuity for which the duration is the lifetime of the beneficiary or for 90 years minus the age of the beneficiary when the annuity is acquired.

Upon the death of the beneficiary, the funds remaining in the trust and the value deemed to be taxed in the trust is the fair market value of the annuity at the time of the beneficiary’s death. Generally, the annuity would have a substantive guarantee period (i.e. 30 years). If the beneficiary dies before 30 years have elapsed, the remaining value would be computed to a lump sum to remain in the trust. If the child with disabilities lives longer than 30 years, additional sums are paid out by the annuity, which would in turn deplete the remaining lump sum. Following the beneficiary’s death, the trustee will distribute any remaining funds to the residual beneficiaries named by the testator at the time they made their Will.

If funds remain in the trust, they will be taxed at the top personal tax rate. This rule was introduced in January 2016 and applies to a testamentary trust when income and capital gains are retained and taxed in the trust, rather than being paid to the beneficiary.

The LBT can be useful for distributing assets upon the death of the beneficiary of the LBT. Generally, if the beneficiary does not have the capacity to write a Will, they would die intestate, and assets would be transferred to the beneficiary’s legal heirs as set out under the applicable legislation. With a LBT, the remaining assets in the trust are not considered part of the beneficiary’s assets on their death, and will instead be taxed and shared based on the Will of the individual (testator) who created the LBT for the beneficiary.


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