Family trusts face higher tax rates.

AuthorBissonette, Laurie

As I get older, I've found that my clients and I seem to talk more and more about retirement and estate planning. Since no one wants to leave their loved ones with a problem, it's a good idea to make these plans well before you think you need them.

If your estate plan includes creating a trust in your will or you are a trust beneficiary or an estate trustee. you may be affected by the federal government's proposals to increase the tax rate for certain trusts. beginning in 2016. These trusts will be taxed at a top tax rate rather than the lower graduated tax rates that some trusts currently pay.


Do the trust proposals affect you?

* Do you have a will?

* Does your will create a testamentary trust or a spousal or common-law partner trust?

* Are you now or will you be a beneficiary of a testamentary or spousal trust?

* Are you a trustee for a testamentary trust?

* Are you an executor of an estate?

If you answered yes to any of these questions, you should revisit your will and estate planning to reflect upcoming tax changes and to ensure your plans will still accomplish your objectives for minimizing taxes and leaving as much as possible to your beneficiaries.

How are trusts taxed?

Family trusts created by a will or estate have played an important role for many years in Canadians' plans to pass on business and investment assets to their families.

Currently, estates and other trusts created in a will (known as testamentary trusts) pay tax on their income at the same graduated rates as individuals. The establishment of a testamentary trust under a will creates a "new taxpayer," which can provide annual tax savings for the trust's beneficiaries.

A spousal trust created in a will has another tax advantage--assets can be transferred in a will to this spousal trust without the deceased spouse having to pay tax on any capital gains that would otherwise be deemed to be realized on his or her death. This tax will be deferred until the surviving spouse dies.

The principal conditions for a spousal trust are that only the surviving spouse is entitled to receive the trust's income and no one other than the surviving spouse is entitled to the trust's capital during his or her lifetime.

On the other hand, a trust that is set up during the settlor's lifetime, known as an "inter vivos" trust, is treated differently. These trusts pay...

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