A Game Changer for Estate Planning

by Lisa Collins, QC, TEP | Dec 18, 2014

Legislation Blue Marker

The federal government has introduced changes to the taxation of trusts, and the implications are so significant, it is a real game changer for estate planning.

Last year the government announced that it was looking at changing how a trust set up under a Will (known as testamentary trusts) is taxed. Previously such a trust was subject to graduated tax rates (like an individual). The government proposed that a testamentary trust be taxed at the highest personal tax rate on all of its income (which is how it is for “life time” or “inter vivos” trusts.)

However, the legislation that was released in late August, 2014 not only implemented those changes, it introduced other changes that appear to result in some unexpected adverse consequences. As a result, this will require a review of and changes to many estate plans.

These tax changes will have the biggest impact on estate plans where trusts are being used. This includes testamentary trusts, as well as certain lifetime trusts, such as Spousal Trusts, Alter Ego Trusts and Joint Partner Trusts. The family situations that may be impacted the most are those involving:

  • second marriages, where there are children from previous relationships, and where a trust is being used for the spouse
  • a disabled beneficiary

The rule changes will also impact situations where charitable gifts are being made by Will.

Here are some of the highlights (or lowlights) of the changes. Future blog articles will drill down into some of the detail, by providing some examples.

  • An estate can take advantage of graduated tax rates for its first 36 months, but there are strict requirements that must be met, including the making of an election. These graduated rates will not apply to a trust set up under a Will.
  • Only an estate that qualifies for the graduated tax rates can access new flexible donation credit rules and take advantage of the nil capital gains inclusion for donations of marketable securities.
  • Only graduated rate estates are able to take advantage of certain rules allowing for post-death tax planning.
  • There is a new “Qualified Disability Trust” for a disabled beneficiary that will qualify for graduated rates, but the requirements for a trust to qualify for this are very specific and can be penalizing if not adhered to.
  • When the life interest beneficiary under a trust dies, the trust is deemed to sell its property at that time and tax would be payable on any gains or other income. Previously this tax was payable by the trust, and thus would be paid using the remaining assets of the trust. The new rules will result in the tax being payable by the estate of the person who has died. The ultimate beneficiaries of the trust and of the deceased person’s estate may be different people, resulting in a frustration of the estate plan (and fighting among family members!).

The changes to the tax laws have not yet been passed by Parliament as of the date of writing this, but it is expected that they will without significant amendment. They are proposed to be effective starting in 2016, with no grandfathering for existing situations.

It is important to review your estate plan to see how these changes may affect you. In my next blog article I will provide an example of an actual situation and explain the impact the changes have made. In the meantime, if you would like our help in reviewing your current estate plan, please contact us to set up an appointment.