Beware of the changes recently announced to tax benefits of testamentary trusts and estates in the Federal Budget 2014
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Have you considered using trusts as part of your estate planning? If so, beware of the changes recently announced in Federal Budget 2014 which, if passed, will eliminate some of the tax benefits of testamentary trusts and estates beginning in 2016.
As background, estates and testamentary trusts (created on death) and grandfathered inter vivos trusts (created before June 18, 1971) use graduated income tax rates. This regime allowed beneficiaries to benefit from more than one set of graduated tax rates, creating potential tax savings. Other types of trusts have all income taxed at the highest marginal tax rate.
Beginning in 2016, testamentary trusts and grandfathered inter vivos trusts will no longer benefit from preferred tax rates and will no longer receive special treatment under a number of other related tax rules.
Flat top-rate taxation will apply to all trusts with 2 exceptions:
- For the first 36 months after date of death, graduated tax rates will apply to an estate that is a testamentary trust. If the estate remains in existence for more than 36 months, it will become subject to the highest marginal tax rate for all income retained in the trust after that time period.
- If the testamentary trust is established for the benefit of an individual who qualifies for the Disability Tax Credit, the trust will continue to benefit from graduated tax rates. More details on this exception will be released in the coming months. Further, where testamentary trusts and estates previously had a taxation year end based on the date of death of the individual, all trusts will use a calendar year end beginning in Dec 31, 2015.
Trusts may continue to be a viable planning tool for estates and family wealth preservation in Canada. Depending on your particular situation and your province of residence, these structures may provide the additional benefits of increased asset protection, control and support of disadvantaged beneficiaries.
Trustees of existing estates, testamentary trusts and grandfathered inter vivos trusts should be aware of the implications of these changes and should consult a tax professional to ensure that they can optimize the use of the structures in place. If you would like more information on trusts and planning for your estate, please contact us.
Where applicable, properly structured, trusts may provide many advantages:
- Protection of capital from the claims of creditors
- Staged distribution to spendthrift beneficiaries
- Capital growth for minor beneficiaries
- Support for disabled beneficiaries without jeopardizing provincial social assistance benefits
- Sprinkling of income to beneficiaries with lower tax rates