A testamentary trust (a trust established by will after death) is subject to tax at graduated income tax rates. Conversely, an inter vivos trust (a trust created during a settlor’s lifetime) is taxed at the highest marginal tax rate applicable to individuals (currently 43.7% in BC).
Consequently, for access to graduated rates of tax for the benefit of heirs and for beneficiaries to manage their tax affairs, it’s common for individuals to create one or more testamentary trusts, including a “spousal testamentary trust ” which allows a deceased person’s property to pass to the trust without triggering capital gains taxes on the property and accessing lower rates of tax to let the surviving spouse manage his or her income. This kind of set-up reduces the surviving spouse’s income, so they can retain their access to income tested benefits such as the Old Age Security pension.
However, the Federal Government issued a discussion paper in June of 2013 containing proposed tax changes that could take away this and other advantages currently granted to testamentary trusts. In particular, beginning in 2016, new and existing testamentary trusts (other than estates during a 36- month period of administration) will pay tax at the highest marginal tax rate. In addition such trusts:
– will no longer be allowed to have an off-calendar year end,
– will be required to make quarterly tax installments on the same basis as other individuals and inter vivos trusts,
– will not have access to the $40,000 basic exemption for alternative minimum tax purposes
– will not have access to the exemption from Part XII.2 tax for testamentary trusts.
Of course, testamentary trusts continue to provide other benefits, like keeping assets from vulnerable beneficiaries (substance abusers, problem gamblers, poor money managers etc.).
Please contact your DMCL advisor to discuss how these proposed changes could affect your estate plan, your interests in existing testamentary trusts or your role as a trustee.