Phil and Judy (not their real names) recently come to our law office in Stittsville (Ottawa) to discuss their estate planning. They have three grown children and had been told by some friends that they could include trusts in their Wills to benefit their adult children. That’s what their friends had done. But Phil wondered if this was still a good idea. He had recently heard that the tax laws relating to trusts might be changing.
I told Phil and Judy that one of the main reasons people often include a trust in their Will for an adult child is because of the
beneficial tax treatment such a trust receives. Under the current law, a testamentary trust created by someone’s death is taxed similar to how an individual taxpayer is taxed at graduated rates. Any income earned by the trust can be taxed within the trust for the first 21 years. Alternatively, it can be sprinkled out to the beneficiaries to be taxed in their hands. This offers income splitting opportunities and can result in significant tax savings for an adult child.
However, as Phil mentioned, changes to the tax laws have been proposed which would reduce the length of time that the graduated tax rates would be available from 21 to 3 years.
I explained to Phil and Judy that even if the proposed changes to the taxation of testamentary trusts occur, there are still many reasons why such trusts may be worth doing. A well-drafted trust offers:
• beneficial tax treatment for some period of time depending on the proposed changes;
• creditor protection for the funds in trust including claims by a child’s spouse leaving the marriage as long as the adult child is not the sole trustee;
• tax savings available due to income-splitting opportunities between the adult child and his/her spouse and children; and,
• protection from depletion by a spendthrift child (or his/her spouse).
If you are wondering if a testamentary trust might benefit one or more of your beneficiaries, make an appointment with one of our lawyers today to discuss your unique situation and estate planning goals.
Reproduction of this blog is permitted if the author is credited. If you have questions or if you would like more information, please call us at 613 836-9915. This blog is not intended to be legal advice but contains general information. Please consult a lawyer or other professional to determine how the information in this blog might apply to you.
Blog posts pre-dated December 1, 2015 were originally published under Neff Law Office Professional Corporation.
