How Testamentary Trusts Can Save Tax

Article written by Jennifer Black and DFS Private Wealth.

How Testamentary Trusts Can Save Tax

As you put together your estate plan, you should talk to your advisors about whether a testamentary trust might be appropriate for you, given your individual family and financial circumstances.

A testamentary trust is generally created automatically when a person dies – the will spells out the terms of the trust, including how long it is to last. Essentially, your property is turned over to a trustee, and the trustee manages your assets according to the instructions in your will and in the best interest of the beneficiaries.

One of the benefits of a testamentary trust is that it can help reduce and defer estate and income taxes on assets such as cash, property and investments. Assets still in the trust do not belong to the beneficiaries and so are not taxed in the beneficiaries’ hands – the trust is itself a taxpayer. Though the tax rates for trusts are the same as the rates for individuals, the trust may be in a lower tax bracket because its income may be lower than the incomes of your heirs. But trustees may allocate some trust income to beneficiaries if those heirs are in a lower tax bracket, ensuring that less tax will be paid overall.

There are different types of trusts. A qualifying spousal trust allows capital property to be tolled over into the trust, deferring capital gains. Capital gains (and their related taxes) can’t be deferred indefinitely, however. The Canada Revenue Agency dictates that all property inside a trust is deemed to be sold every 21 years, meaning capital gains will be realized – and taxed.
There are many reasons in addition to tax savings and deferral to consider setting up a testamentary trust. For example, you may want to create a trust to…

  • Ensure that important family property is passed down to future generations of the family by allowing your heirs to use the property, but keeping its ownership in the trust
  • Look after assets intended for beneficiaries who are still minors, releasing funds or other assets to younger beneficiaries over time
  • Protect your assets from any creditors your beneficiaries might have
  • Ensure family members with disabilities are looked after
  • Ensure your children inherit as you wish, regardless of whether you may have a new spouse

If you want to protect your property and wealth from excess taxes, and if any of the other benefits of testamentary trusts apply to your situation, talk to the estate-planning experts at DFS Private Wealth. They will look at your overall financial and family situation and work with you to tailor a plan that’s right for you.

There are changes that will be coming for the way trusts are taxed. To discuss contact us today.

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