Planning Considerations for Qualified Disability Trusts
Earlier this week I blogged about planning considerations for establishing a testamentary trust that may qualify as a graduated rate estate. To continue on the topic of planning consideration in light of the recent changes to the Income Tax Act, I thought it would be fitting to highlight some considerations regarding the newly introduced Qualified Disability Trust (the “QDT”).
One planning technique that is commonly used when disabled beneficiaries are involved is a Henson Trust. It is important that testators understand that the creation of a Henson Trust does not automatically qualify as a QDT since the disabled beneficiary must be a recipient of the Disability Tax Credit. Accordingly, it would be prudent to highlight that it is possible that the income earned from the Henson Trust may be subject to top-rate taxation.
It is also quite common for a testator to identify the beneficiaries of a testamentary trust as a class of beneficiaries such as children or issue. However, given that testamentary trusts are now taxed at the highest rates, a testator may wish to specifically name the beneficiaries of the Trust in the event that the named beneficiary becomes disabled during the length of the testamentary trust. In doing so, the testator will have satisfied one of the requirements for the Trust to be designated as a QDT.
The limit of one QDT election per beneficiary also raises some estate planning challenges. It may be necessary to explore planning solutions in situations where the named beneficiary of an insurance trust and a testamentary trust is disabled. In this case, the testator may want to consider whether both trusts are necessary.
It is extremely important that clients understand the estate planning challenges that arise when attempting to take advantage of the graduated rate of taxation, and should discuss any estate planning options with a tax professional before a final decision is made.
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