Adult Children
Parents wishing to give their adult child tax advantages that the child could not otherwise enjoy should consider including a trust in their Wills. A testamentary trust is treated as a separate taxpayer and the income earned by the trust is taxed at graduated rates (the more the trust earns, the more it is taxed up to a certain limit).
During the first 21 years of the trust’s existence, the trustee can elect to have trust income taxed within the trust rather than in the child’s hands creating income-splitting opportunities that the child would not otherwise enjoy. If the trust allows for multiple beneficiaries such as the child, the child’s spouse, and the child’s children, the trust income can be sprinkled among the beneficiaries in proportions that could significantly reduce taxes. This is particularly useful if some beneficiaries are not working or have limited income. After 21 years, all trust income must be taxed in the hands of the beneficiary(ies) from that point on. Every 21 years of the trust’s existence, there is a deemed disposition of all capital assets – think of this as bringing capital gains or losses up to date.
Getting the Child Involved as Trustee
The terms of a trust can specify that the adult child be named as the trustee of his or her own trust. It is also possible to appoint the adult child as a co-trustee with the initial trustee (such as a more mature relative). Some parents appoint the adult child as co-trustee at an age when it is hoped that the child will be more responsible, say 25. The adult child could become be sole trustee at some point, such as at age 30.
If parents are concerned about possible claims against the trust by the child’s creditors, this can be addressed with specific terms as well. At a minimum, the child should not be a sole trustee of his or her own trust if there are concerns about creditors.
Summary
Through the use of trusts in estate planning, you can ensure your loved ones benefit in the best possible way from your estate after you are gone. I encourage you to discuss with your lawyer what role trusts could play in your estate planning.
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.
