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Using Trusts: The Future is Bright

On January 1st, several new income tax rules for trusts and estates came into effect. An overview of these significant changes are discussed in our Special Advisory. While we understand that there is an ongoing dialogue between the Federal Ministry of Finance and several professional organizations regarding possible changes to two of these new rules, most, if not all, of the changes are here to stay. These changes do not eliminate the many and diverse benefits of trust planning, nor should trusts, including in Wills or established during one’s lifetime, be considered as unattractive options. 

I have previously blogged about the continuing tax benefits of using trusts in your Will. These benefits include:

  • income splitting among lower-income beneficiaries;
  • using the three-year period allowed for graduated rate estates;
  • using qualified disability trusts where applicable which will still be taxed at graduated rates; and
  • avoiding the payment of Ontario Estate Administration Tax and probate fees in other jurisdictions on the value of the assets in the trust which would otherwise be paid if the assets were to pass through your beneficiary’s estate on their later death.

As an illustration, if you left $1M to a beneficiary outright and that person had $1M of their own assets, when the beneficiary dies the funds you left them which still remain and are owned by him or her at death are included in their estate’s value. Their estate would pay approximately $30,000 in Estate Administration Tax. If instead you left $1M in a trust, the funds are not considered to be an asset of your beneficiary’s estate and their estate would only pay approximately $15,000 in Estate Administration Tax on the value of their own assets.

Trust planning can allow for further savings as the extra expenses associated with complying with the regulations under the Estate Administration Tax Act (Ontario) can be minimized, including potentially expensive and time-consuming valuation of assets.

Regular readers may also recall my previous blog about some of the non-tax benefits of trust planning, which make trusts an attractive and useful option for estate planning regardless of the tax benefits. Trust planning is not only very important to avoid the many negative consequences of leaving assets directly to children and others who are not financially mature, but can also preserve capital for future generations as well as protect against future creditor or marital property claims. Some beneficiaries are also better protected if they are not left to manage an inheritance or gift on their own, but instead have the benefit of a co-trustee’s skills.

Not only may your family members be better protected by trust planning in your Will, trust planning for yourself during your lifetime may better protect both you and your legacy to your beneficiaries. People are becoming increasingly aware of the ways that inter vivos trusts (trusts set up during your lifetime) can assist them in meeting their estate planning goals. For example, an inter vivos trust can:

  • better protect your assets from claims after death than having assets flow directly through your estate;
  • work as a substitute for asset management by an attorney for property for incapacity planning; and
  • minimize Estate Administration Tax for your estate on death (trust assets should not form part of your estate for Estate Administration Tax purposes, as discussed above).

The continued benefits of trust planning in your Will or during your lifetime are numerous and varied, notwithstanding the income tax changes which came into effect this month. Trusts can enhance and protect your beneficiaries’ financial situation and your legacy to your loved ones, while allowing for flexibility and tailoring to each unique situation, as well as delivering many tax benefits. For these reasons, we firmly believe that trust planning is not going away anytime soon, and instead the future will only see the increasing use of trusts.

— O’Sullivan Estate Lawyers

Please watch for our next blog post which will review the Law Commission of Ontario’s recently released interim report Legal Capacity, Decision-making and Guardianship.

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.