Testamentry Trust

Where a person owns significant registered or non-registered investments and/or life insurance policies with significant proceeds (in excess of $500,000 combined), the person could benefit from including one or more testamentary trusts in his/her will to minimize the amount of tax his/her estate will have to pay on his/her death or his/her beneficiaries will have to pay on any income they earn on the assets left to them. A testamentary trust is one that takes effect on a person’s death, and it is treated as a separate taxpayer for tax purposes (separate from its beneficiaries), subject to the marginal tax rates applicable to all individuals. Including one or more testamentary trusts in a person’s will gives the person’s estate the ability to split any income on such assets between his/her beneficiaries and the testamentary trusts, thereby reducing the overall income tax paid on such income.

testamentry1At a minimum, it is useful to establish two testamentary trusts in a person’s will: one that is exclusively for the benefit of the person’s spouse during the spouse’s lifetime (a “spouse trust”), and one that is for the benefit of the person’s spouse and children (a “family trust”). The executor of the person’s will can then have the ability to determine which of the person’s assets would be allocated to each trust, depending on the tax result. By way of background, an individual is deemed to have disposed of all his/her capital property (including his/her investments) immediately before his/her death for fair market value. To the extent this value exceeds the cost at which the individual acquired these assets, a capital gain will result to his/her estate, one-half of which is taxable. There is an exception to this rule where property is left to a spouse or spouse trust. Thus, the individual’s executor would likely choose to allocate property to the spouse trust on which a gain would otherwise be realized on the individual’s death. All other property would then be allocated to the family trust. With respect to any future income earned on the assets in each trust, the executor would then have the ability to determine how much of this income should be taxed in the trust (and then distributed to the beneficiary) or how much should be taxed in the beneficiary’s hands directly, depending on what makes sense at the time from a tax point of view. Because the testamentary trusts are viewed as separate taxpayers from their beneficiaries, the end result would be that less income tax would be paid than if all the income is earned directly by the beneficiary. For example, if the non-registered investments were to earn $60,000 of income or gains in a given year, the tax on this income would be far less if earned by a both a testamentary trust and its beneficiary, rather than just by the beneficiary.

testamentry2Testamentary trusts are useful, not only for income splitting purposes, but also for creditor proofing purposes. Because the trustee holds legal title to and has control over the assets and the beneficiaries only have a right to benefit from the trust property (if the trustee exercises his/her discretion to allow the beneficiaries to benefit), trusts are an effective means of protecting one’s assets from the claims of outside parties, such as the spouses of the person’s children (if there is a marital breakdown) or creditors of the beneficiaries. Testamentary trusts are also useful because they allow the individual to have greater control over the distribution and use of his/her assets, as each trust can have specific assets and/or beneficiaries and the trustee may decide when assets go to a particular beneficiary depending on their needs, income level and personal circumstances at the time.

Depending on the extent of the person’s assets as well as the person’s goals, the person may wish to include additional testamentary trusts in his/her will to assist with income splitting and/or creditor protection. For example, a person may wish to establish a separate trust for the benefit of each of his/her children (in addition to the family trust above for the benefit of all family members together). If the child is old enough, the child could be the sole trustee of the trust established exclusively for his/her benefit, and thus, may make all decisions regarding the trust.



Better Business Bureau Lunch and Learn

Date: September 26, 2019
Check-in/Registration: 11:45am
Lunch: 12-1pm
Seminar: 12-1pm

Location: The Winston Golf Club - 2502 6 Street NE Calgary, AB T2E 3Z3


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