Wealth Strategies: Formal trusts and estates - Legislative update

NEW COMPLICATIONS FOR TRUST PLANNING

The 2014 Federal Budget passed important legislation with respect to testamentary trusts and their taxation. Specifically, all trusts with the exception of Graduated Rate Estates (GRE’s) and Qualified Disability Trusts will be subject to the top tax rate on income retained in the trust. These changes will take effect as of 2016 with no grandfathering of prior trusts being offered. 

“An estate can be a GRE if it’s a testamentary trust in the first 36 months after death. (If the trust still exists 36 months after the testator’s death, it no longer qualifies as a GRE and will generally be taxed at the highest marginal tax rate.) Once an estate designates itself a GRE, none of that person’s other estates can make the same designation. The first taxation year in which the designation can be made is the one that ends after 2015. Each year, the GRE-designated estate will need to include a reference to the deceased’s social insurance number (SIN) in its return. If no SIN is available, the estate will have to file other information; the finance minister hasn’t yet said what that might be. An existing trust can qualify as a GRE starting in its first year-end after 2015, provided it hasn’t existed for more than three years since the person’s death.” 

This in turn means that a number of the valuable estate planning* tools for which testamentary trusts have offered will not apply unless it qualifies under the new legislation. Some of these benefits include graduated tax rates, loss carry-back provisions on private company shares, donating securities with capital gains, $40,000 exemption from Alternative Minimum Tax, allocating tax credits to beneficiaries, distributions of income to non-residents, distribution of trust property to beneficiaries on a tax-deferred basis, flow through of pension income to beneficiaries and flow through to a beneficiary of the first $10,000 of a death benefit received by the estate (which is excluded from tax).

Additional planning will be required to ensure that the trust is meeting the GRE rules in order to take advantage of the obvious benefits that a testamentary trust has offered for estate planning* purposes. Working with a qualified firm and/or applicable professionals whom have the necessary expertise can assist individuals in preparing for the coming changes in 2016.

 

* Offered through Canaccord Genuity Wealth & Estate Planning Services