Federal Changes to Testamentary Trusts

The Federal Government is currently changing some of the rules governing testamentary trusts in Canada. If you have already set up a testamentary trust, you might want to consider consulting with a lawyer to investigate the ways this could impact the estate plans you currently have in place.

Specifically, the 2014 Federal Budget proposes that beginning in 2016 all income earned within testamentary trusts 36 months after the death of the testator will be taxed at the highest marginal tax rate for an individual. There will, of course, be certain exceptions, such as trusts set up for the benefit of disabled individuals. Seek clarification from a lawyer.

This may impact your estate plan by making some of the tax planning strategies you have put in place ineffective. For instance, strategies such as the use of multiple testamentary trusts, tax-motivated delays in completing the administration of estates, and avoidance of the OAS Recovery Tax will need to be revaluated.

However, this does not mean that testamentary trusts are no longer capable of achieving any of your tax planning goals. For instance, in certain circumstances it may still be fruitful to set up testamentary trusts that pay income to an adult child and their young children who have little or no income. In those circumstances funds may be deducted by the trust and reported by the low-income beneficiary.

Further, testamentary trusts will continue to be useful for other non-tax motivated estate planning strategies. For instance, an individual with children from more than one marriage may want to hold funds in trust to ensure that funds go to the children from a previous marriage. There are also circumstances where a beneficiary suffers from a disability and requires funds go to a discretionary trust to preserve social assistance benefits. Finally, very young beneficiaries may be incapable of managing large sums of money, in which case a testamentary trust continues to be an attractive option.

The message to take home is that the rules governing testamentary trusts are changing, and, if you have set up a testamentary trust in your will, you should consult with a lawyer in order to ensure that your estate planning goals continue to be reflected by your estate plan. I, of course, would be more than happy to meet with you and discuss your estate planning strategies going forward.