Tax savings of a testamentary trust may outweigh the costs of setting one up

A Testamentary Trust, which means 'a trust in a will', comes into being at the death of the testator - the owner of the will. The will may contain more than one of them and may address all or a portion of the estate.

They are created according to the instructions that were included in the will of the deceased. Generally, they are set up by a lawyer after the net value of the estate has been determined.

Because people are living longer today it’s likely that when our children inherit our assets, they will be in their fifties or sixties and will have built up considerable portfolios.

Your assets added to theirs may create a large tax burden for them. That's when these trusts can be a good solution. All or a portion of the remaining estate can be transferred to one, as directed in your will.

The beneficiaries are family members, other individuals or charities. The trustee is often the executor of the will but could also be another person named in the will. They become the legal administrator and they control the management of the assets in the trust. Duties include making decisions about the investment of the assets and filing tax returns. 

The terms can provide for the payment of income or capital or both to the beneficiaries. 

The primary benefit is the favorable tax treatment they receive. Tax is paid according to the graduated rates in the Canadian Federal Income Tax Act.

This can make it more beneficial to retain income and gains and have them taxed in the trust rather than taxed in the beneficiaries’ hands.

Assets are subject to the "21 year deemed disposition rule" in the Income Tax Act. That provision considers all the assets as though they are sold every 21 years, with any capital gains taxed at that time.

Costs of setting up them up, need to be weighed against the tax benefits. If you think it makes sense for your family, talk with your children and heirs before making any changes to your will.

Then consult with your financial planner, accountant and lawyer.


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