Testamentary Trusts – Not As Advantageous As Before, But Still Useful | Kerr Financial
Estate & Trust
Testamentary trusts – not as advantageous as before, but still useful
Category: Estate & Trust

Currently, a testamentary trust, which is a trust created in a person’s will, can provide tax savings for a number of years by having its income taxed at the same graduated tax rates as for individuals.

Changes were enacted in the 2014 Federal Budget to limit the period during which a testamentary trust could benefit from graduated tax rates. Effective January 1, 2016, all testamentary trusts will be subject to the top Federal tax rate, except for certain “graduated rate estates” (GRE’s) and “Qualified Disability Trusts” (QDT). Graduated tax rates will apply to GRE’s for up to 36 months after the date of death, a timeframe during which most estates should be settled. A graduated rate estate must be designated as such on its first tax return that ends after 2015. After this 36 month period has elapsed, a deceased individual’s estate would be considered a flat top-rate estate for 2016 and all subsequent years.   The new rules also allow graduated tax rates to apply to a testamentary trust, known as a Qualified Disability Trust, whose beneficiaries are eligible to receive the federal Disability Tax Credit. The QDT is not subject to the 36 month limit with respect to graduated rates. It should be noted that there is only one GRE per deceased individual and one QDT per disabled beneficiary.

  • Despite the changes to the tax rules, testamentary trusts are still useful, owing to other advantages, such as the following:
  • In the case of minors who are receiving assets pursuant to a will, a trust will allow the deceased to name a trustee who can control the flow of income and capital to beneficiaries, as needed.
  • It can protect individuals with mental and health issues.
  • In the case of reconstituted families, if there are children from a first marriage, then a spousal trust could provide income for the surviving spouse and a tax-free rollover of assets. However, on the death of the surviving spouse, provision could be made in the will to have the remaining assets distributed to the children from the first marriage.
  • It protects the assets from creditors as long as the assets are held in a testamentary trust.

Gifts in respect of a taxpayer’s death

Until the end of the year 2015, if a gift by will is made, it can only be applied to the deceased’s final tax return or the previous year’s tax return but cannot be used against income earned by the estate. Starting January 1st, 2016, a gift by Will or by direct designation will now be deemed to have been made by the estate at the time the property is transferred to the recipient charity and not deemed to have been made by the deceased immediately before death.

These new rules will provide more flexibility and may result in increased tax savings for graduated rate estates. This will enable the trustees to choose whether to allocate the donation against any of the following taxation years, as long as the gift is made within 36 months of the date of death:

  1. The taxation year of the estate;
  2. Any earlier taxation year of the estate, or;
  3. The last two taxation years of the individual prior to death.

Since these changes take into effect starting January 1st 2016, now is the time to meet your advisor to discuss the tax implications of these changes and make changes to your will, if necessary.

Kerr Financial

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Kerr Financial Group was formed in 1979 for the purpose of assisting individuals to maximize their personal financial resources, alleviate their financial and retirement concerns and simplify the administration of their affairs.

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