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Estate Planning - Testamentary Trusts

Estate Planning - Testamentary Trusts

We recognize that estate planning and administration can be a very personal matter that often requires unique attention to ensure that your wishes are carried out precisely, while minimizing the potential for family disputes. Your Will should be reviewed every five years with a legal professional to ensure that your wishes are observed and that your estate plan properly meets your current needs.

Our Estate Planning services include:
  • Will drafting
  • Powers of Attorney for Personal Care (a “living will”)
  • Powers of Attorney for Property
  • Family Trusts
  • Estate Planning
  • Assisting Estate Trustees with all aspects of Estate Administration
  • Life and Estate management services

Testamentary Trusts

Many lawyers, when preparing an estate plan, often overlook testamentary trusts. However, testamentary trusts can provide significant tax benefits because of the preferential treatment such trusts receive under the Income Tax Act. Placing assets in trust can also provide significant non-tax estate planning benefits. There are significant tax and non-tax reasons why testamentary trusts should be considered as part of an overall estate plan.

What is a Testamentary Trust?

A testamentary trust is any trust that arises on death through a Will. A testamentary trust creates a legal relationship between the settlor (the “testator”) of the trust and the trustee (often the “executor” of the Will) and the beneficiaries of the trust (family members or other individual beneficiaries of the testator or charities). The terms of the trust can provide for the payment of income or capital or both to the beneficiaries. Either the interests of all beneficiaries can be fixed in the Will or discretion to allocate the income and/or capital among the beneficiaries can be left to the trustee.

Tax Saving Benefits of a Testamentary Trust

Testamentary Trusts receive favourable tax treatment under the Income Tax Act. Unlike other trusts, testamentary trusts pay tax using the graduated rates in the Income Tax Act on income retained in the trust, although they do not receive the personal deductions available to individuals. As a result, income that would otherwise be taxed at the highest marginal rate can be taxed at a graduated rate in the trust. This is the main tax benefit to placing income producing assets in a testamentary trust.

Spousal Testamentary Trusts

In a spousal testamentary trust, a testator leaves assets to a testamentary trust for the benefit of the testator’s spouse, usually for the spouse’s lifetime. The terms of the trust will provide that all of the income be paid or payable to the spouse during his or her lifetime and may also include access to capital in the trustee’s discretion or at the request of the spouse. On the spouse’s death, the assets pass to other specified beneficiaries (typically children or charities) either outright or in a continued trust.

A trust established in this way provides an additional tax benefit in that the assets initially transferred to the spousal testamentary trust are “rolled” in to the trust at the testator’s adjusted cost base. In this way, the tax that would otherwise be payable on any capital gain inherent in those assets is deferred until the second spouse’s death.

When should I consider a Testamentary Trust?

A testamentary trust can be useful in many situations including:
  • Spouses who have sufficient assets in their own name to permit the other spouse’s assets (or a portion thereof) to be held in trust without full access to the capital. Because tax is paid by the trust, the savings noted previously can occur.
  • Children or grandchildren who have their own assets and who would benefit from the tax advantages of having the trust as a separate taxpayer.
  • To protect and arrange for financial security for a disabled or dependant child.
  • For assets that are not necessarily income producing but where continuity of ownership and control is important. For example, this could apply to a cottage or shares of a small family business corporation.
  • Where the estate plan includes benefiting a charity or charities but where the assets are required to continue support for a spouse or children.
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