Why trusts still makes sense
Whether you’re looking to reduce taxes, look after a family member who is disabled, or simply prevent one of your kids from squandering their inheritance, trusts can be really useful planning tools.
So much so that the federal government plans to eliminate some of their tax benefits by the end of next year.
At issue specifically are what’s known as testamentary trusts, a legal arrangement which kicks in upon your death and allows an estate trustee to manage your property for the benefit of someone else.
When you set up such a trust, what you’re doing is entering into a three-way legal relationship between you — the person setting up the trust (the settlor) — the individual you appoint to look after things (the trustee) and whoever will ultimately own the assets (the beneficiary) — which could be members of a group, an individual, or perhaps even a charity.
In the case of a testamentary trust, the assets indicated in the will are transferred to the trust as the estate is being settled. Since the trust is considered a separate taxpayer, it pays tax at the same graduated rates as individuals, which could result in less tax if the beneficiary has little or no other income — a student, for instance.
Beginning in 2016, however, those graduated rates will apply only for the first 36 months to enable the executor to settle the estate. Should an estate remain after that period, it will be taxed at a much higher flat rate, Finance Minister Jim Flaherty announced in his new budget.
The good news is that Ottawa will maintain the graduated taxation rate for testamentary trusts whose beneficiaries are eligible to receive the federal Disability Tax Credit, a source of comfort to those using such arrangements to look after disabled family members.
These particular trusts, known as Henson Trusts in Ontario, are worded so that the disabled child is deemed not to have personally received the inheritance.
If the child is considered not to personally own the assets, then he or she can continue to receive full government benefits. Meanwhile, the designated trustee can pay out the trust assets for the benefit of the child at its discretion.
Does all this mean trusts are dead? Far from it, since the changes only affect one particular type of trust. There are still several options available to you, particularly as you approach retirement.
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