David, 68, wants to ensure his common-law partner, Sarah, 65, receives continued financial support after his death, but he wants the remaining capital to eventually go to his two adult children from a previous marriage. He is considering establishing a spousal trust in his will. What is a key tax advantage of using such a trust over an outright bequest to Sarah, followed by her own will distributing to the children?

Question: David, 68, wants to ensure his common-law partner, Sarah, 65, receives continued financial support after his death, but he wants the remaining capital to eventually go to his two adult children from a previous marriage. He is considering establishing a spousal trust in his will. What is a key tax advantage of using such a trust over an outright bequest to Sarah, followed by her own will distributing to the children?

Answer options:

• The spousal trust eliminates capital gains tax on deemed disposition of assets at David's death.
• The trust allows for a tax-deferred rollover of assets to Sarah, and then those assets are taxed in the trust when distributed to the children.
• Income earned within the spousal trust is tax-free until the ultimate distribution to the children. ✅ Upon David's death, assets transferred to the spousal trust are eligible for a tax-deferred rollover until Sarah's death, at which point the deemed disposition trigger occurs.

Correct answer: Upon David's death, assets transferred to the spousal trust are eligible for a tax-deferred rollover until Sarah's death, at which point the deemed disposition trigger occurs.

Explanation: A spousal trust allows assets to roll over to the trust on a tax-deferred basis at the death of the first spouse (David). The deemed disposition that typically occurs at death is postponed until the death of the surviving spouse (Sarah), provided certain conditions are met.