Tag: graduated rate estates

11 Mar

Planning Considerations for Qualified Disability Trusts

Lisa-Renee Estate & Trust, Estate Planning, RRSPs/Insurance Policies, Trustees, Wills Tags: , , , , , , , , 0 Comments

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”).

moneyOne 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.

Thanks for reading!

Lisa Haseley

You might also like:
Qualified Disability Trusts
Graduated Rates and Changes to the Income Tax Act
More Changes to the Taxation of Testamentary Trusts

08 Mar

Planning Considerations for Graduated Rate Estates

Lisa-Renee Beneficiary Designations, Estate & Trust, Estate Planning, Executors and Trustees, Trustees Tags: , , , , , , , , 0 Comments

Our blog has previously discussed Graduated Rate Estates (“GRE”) and changes to the Income Tax Act, which now limit the benefit of graduated rates of taxation for up to 36 months from the date of death if the estate qualifies as a testamentary trust, and is designated as a GRE in its first taxation year.

MoneyChanges to the tax benefits of testamentary trusts raise a number of planning considerations that should be considered when making an estate plan.  First, when drafting a testamentary trust, a key consideration should be whether it would be beneficial to the estate and its beneficiaries to delay the distribution of the estate for up to three years to potentially maximize the progressive taxation rates of all income in the trust.

If a testamentary trust is established with a view to take advantage of the new tax regime, then another important consideration is the extent of discretion that a testator wishes to grant to his or her Estate Trustee. Since an estate must maintain its status as a GRE, a testator may wish to clearly direct his or her Estate Trustee to take steps necessary to use or manage the estate assets in a manner that is consistent with the GRE requirements set out in section 248(1) of the Income Tax Act.   Alternatively, the testator may wish to authorize his or her Estate Trustee to determine whether it is necessary or beneficial to preserve the estate’s status as a GRE in light of circumstances that may arise post-mortem.

All estate planning considerations that are intended to take advantage of changes to the Income Tax Act should be discussed with a tax professional throughout the estate planning process.

Thanks for reading!

Lisa Haseley

29 Apr

More Changes to the Taxation of Testamentary Trusts

Hull & Hull LLP Estate & Trust, In the News Tags: , , , 0 Comments

On April 23, 2015, the Ontario Government released its 2015 Budget.  Among other things, the Budget proposes changes to the taxation of testamentary trusts.

Traditionally, inter vivos trusts (those created by an individual during their lifetime) have paid tax at the highest individual income tax rates, whereas testamentary trusts (which are created by a will) have enjoyed taxation at marginal rates. The income earned with respect to testamentary trusts has traditionally been taxed on a separate tax return, and as such, many have used testamentary trust as a means to income split, significantly minimizing their overall taxes payable.

The Federal Government in its 2014 Budget was the first to propose changes to the taxation of testamentary trusts. Specifically, the 2014 Budget announced the elimination of the favourable tax treatment enjoyed by testamentary trusts, such that all trust income would be taxed at the highest marginal rates, and in a similar manner to the taxation of inter vivos trusts.

Draft Federal legislation was subsequently proposed in August, 2014 and was formally enacted in December, 2014, such that the changes would be effective at the Federal level as of January, 2016.

The 2015 Ontario Budget now proposes the implementation of these Federal legislative changes to the taxation of testamentary trusts at the Provincial level.

The changes would mean that testamentary trusts will be taxed at the highest marginal rate with only two exceptions:

a) Graduated Rate Estates (trusts arising as a consequence of the death of a testator rather than because expressly provided for by the terms of a will) would still be taxable at marginal rates, for the first 36 months after the testator’s death; and

b) A Qualified Disability Trust, i.e. a testamentary trust with a beneficiary who qualifies for the disability tax credit, would still be eligible for marginal rates.

In addition, the 2015 Ontario Budget proposes that Ontario tax credit for charitable donations over $200 would be raised to 17.41% for trusts that pay the top marginal personal tax rate.

The government will introduce legislative amendments to implement these measures which, if passed, will take effect January, 2016.

Thank you for reading.

Suzana Popovic-Montag

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