Are testamentary trusts still useful?

A testamentary trust is a trust established by a person, usually in a will, that benefits another person upon the death of the will maker or creator of the trust. Prior to January 1, 2016, a testamentary trust will be treated for tax purposes as a separate taxpayer from the deceased's estate and the trust's beneficiaries, receiving the benefit of graduated income tax rates applicable to individuals. The federal government has recently amended the Income Tax Act, changing rules for certain trusts, including testamentary trusts, by:

1. Eliminating the graduated income tax rates for testamentary trusts;
2. Taxing capital gains in beneficiaries’ hands instead of in the trust itself; and
3. Allowing charitable donations in an estate plan to be allocated between the deceased and his or her estate.

 

While these changes eliminate many of the tax advantages previously enjoyed by testamentary trusts, they do not eliminate other worthwhile legal and estate planning objectives accomplished using trusts.

Thankfully, testamentary trusts established for disabled beneficiaries, known as Qualified Disability Trusts, will continue to enjoy graduated income tax rates. A Qualified Disability Trust is a testamentary trust that is resident in Canada with one or more beneficiaries who qualify under the Income Tax Act for a disability tax credit. Importantly, if the beneficiary of a trust subsequently becomes disabled, becoming eligible for the disability tax credit, the trust can be converted to a Qualified Disability Trust.

Charitable giving in estate planning continues to be encouraged. Beginning January 1, 2016, a donation can be allocated between the deceased and his or her estate. The deceased's tax filers may use the donation in the year of the donation, or carry it back to any prior taxation year, or carry it forward for up to five years. The avoidance of capital gains tax on the charitable donation of publicly traded securities also remains in place. A properly documented charitable gift in your estate plan can effectively avoid the payment of tax and set aside that money for a desired charitable purpose.

Regardless of the recent changes to the taxation of trusts, they remain useful estate planning tools that should still be considered. The remaining advantages of using testamentary trusts include:

1. Improving the quality of life of a beneficiary who is either too young to have access to such money or who cannot be trusted to manage the money wisely.
2. Protecting capital you leave behind from a beneficiary's creditors, including spousal claims.
3. Providing for a "new" spouse or partner while preserving capital for your children.
4. Using alter-ego or joint partner trusts to avoid probate fees and the probate process, and wills variation claims that can potentially be made against your estate by a spouse or child who is unhappy with your estate plan.

The loss of the previously described tax benefits for these trusts makes the process of assessing whether the benefits of doing so outweigh the ongoing costs to administer the trust more challenging. However, important benefits can still be achieved from the use of trusts in estate and incapacity planning, making their use worthwhile.

 

 

This article has been written by Roy Sommerey. Roy is a senior partner at Doak Shirreff Lawyers LLP and has extensive experience advising people in the areas of Wills, Estates and Estate Planning, and Family Trusts. Visit his bio at http://www.doakshirreff.com/roy-sommerey or contact him directly at 250-979-2528 or at [email protected].

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.