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What’s Tax Got to Do With It? Trust Planning in Wills After Graduated Income Tax Rates are Eliminated

With the advent on January 1, 2016 of the new income tax rules eliminating graduated income tax rates and imposing tax at the top marginal tax rate for testamentary trusts (trusts set up in Wills), some people may be of the view that using trust-planned Wills is far less attractive or even no longer useful. However, this view is based on the narrow assumption that trust planning in Wills is only income tax-driven. Our view is that there are some excellent reasons to consider trust planning in your Will which have absolutely nothing to do with income tax, and that this change of legislation will in fact be the genesis for a renewed appreciation for using trusts in Wills.

In February 2014 I blogged about the continuing tax benefits of using trusts in your Will, including income splitting among lower income beneficiaries, the three-year period of the graduated rate estate and qualified disability trusts. While not an income tax benefit, setting up a trust in your Will can also avoid the payment of Estate Administration Tax (probate fees) on the value of the assets in the trust which would otherwise be paid by the beneficiary’s estate if the assets were owned by them outright on their death. This is another potential tax savings of using a trust in your Will.

Further, the regulations under the Estate Administration Tax Act (Ontario) which came into effect January 1st of this year require an estate information return to be filed. The return must list all of the assets regarding which Estate Administration Tax has been paid and provide a considerable amount of detail regarding each asset. If you set up a trust in your Will, the trust assets should pass outside of the beneficiary’s estate on their death, which would reduce the costs of compliance with these regulations since these assets would not be included in an estate information return.

Aside from the continuing tax benefits, there are several frequent estate planning objectives which a trust in your Will can address. 1. You may be concerned about assets being lost to a beneficiary’s creditor-assets which are placed in a trust for a beneficiary are more insulated from creditor claims than assets otherwise transferred or paid directly to a beneficiary.

2. You may be concerned about assets falling into the hands of a child’s spouse on marriage breakdown or falling into the estate of your surviving spouse who remarries after your death and passes the assets to a new spouse and not your children, grandchildren or your other beneficiaries but to someone else’s. Assets which are placed in a trust are much less likely to be available to satisfy matrimonial claims or included in the value of the beneficiary’s assets for matrimonial property claim purposes. The capital of a trust in the normal course will pass to those beneficiaries you direct, and not to the beneficiaries of a beneficiary’s estate.

3. You may worry about a loved one’s ability to manage funds if left to them outright, for a variety of reasons. Trusts can be a good choice for planning not only for a disabled beneficiary who will required lifetime care or who is receiving ODSP and therefore should not be given assets outright, but also for a beneficiary who may not be very good at managing money, or who is young and unable or unused to managing money. Different drafting options are available to either keep the management entirely out of the beneficiary’s hands, to allow them some involvement but not control, or to provide a gradual increase of control over the management of the trust fund, thus acclimatizing the beneficiary to management without it coming all at once or at too young an age.

There are a variety of reasons why you should consider trust planning in your Will despite the income tax changes coming into effect in 2016. Because trusts are flexible and can be customized to fit a particular situation and beneficiary, they can both provide for your loved ones and provide you with peace of mind that your loved ones will be appropriately taken care of without undue control, responsiblity or stress. And for most of us, that’s a more valuable benefit than tax savings.

— O’Sullivan Estate Lawyers

Join us for our next blog post in which we will discuss acquiring trust interests before marriage.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.