What are the pros and cons of testamentary trusts in estate planning?

Article content material

By Julie Cazzin with Allan Norman

Q: My two sisters and I are within the strategy of doing a little estate planning for my mom, who’s 80 years outdated, has Alzheimer’s and doesn’t have lengthy to reside. We try to grasp how a testamentary belief works in addition to the 21-year deemed disposition rule. My mom’s property will likely be value about $4 million (a cut up of fifty per cent in rental actual property and 50 per cent in a dividend inventory portfolio). Her principal residence is value $1.5 million and is over and above the $4 million in investments. We’re all in our 50s, very comfy financially and wish to go away the property to my mother’s 4 grandchildren, the youngest of whom will flip 18 this 12 months. Is that this one thing we must always think about? In that case, would it not be of profit in our circumstances? — Maritia

Article content material

Article content material

FP Solutions: Maritia, I’m curious to know why you consider a testamentary belief could also be a good suggestion. It is likely to be, however not with out some work and duties for the trustees. Plus, along with your mother having Alzheimer’s, chances are you’ll not have the ability to change the desire. Begin by asking your self what you need to obtain. Is there a substitute for a belief? As I talk about testamentary trusts under, think about if that’s what you need to get into and if there’s an alternate.

A testamentary belief is established by an individual at their demise, and they’re the settlor, that’s, the one who places property into the belief. They will set up one belief, or a testamentary belief for every grandchild.

There’s additionally a trustee, who’s the authorized proprietor of the property, in addition to a beneficiary, who’s the helpful proprietor of the property. The trustee and the beneficiary may be one and the identical, however you will have choices.

For instance, you (otherwise you and your siblings) may very well be trustees, the grandchildren may very well be trustees, you possibly can have an expert trustee or any mixture of those. It is going to rely partly on the aim of the belief and the capability of the trustees to fulfil their duties.

Article content material

Article content material

Trustee duties embrace observing the phrases of the belief, appearing in good religion, coping with an “even hand” for all beneficiaries, except permitted to not (say, for tax causes). The trustee can’t delegate their duties to another person, and so they need to hold data, file the tax returns and make the whole lot accessible to the beneficiaries.

Trustees are entitled to fee for his or her work and reimbursement for bills, however they will’t secretly take cash for themselves. Being a trustee isn’t a short-term job; it requires work and a trustee may be held accountable.

The 2 primary causes for establishing a testamentary belief are to exert management over the belongings in addition to to earnings cut up. Exerting management isn’t nearly proscribing entry to the property within the belief. It can be about encouraging grandchildren to perform sure issues.

For instance, till they attain, say, 25, they will solely entry the belief for academic functions, or withdraw $10,000 a 12 months to be spent on journey, or advantages will solely be paid to them as soon as they’ve established their potential to carry a daily job, and so forth.

Article content material

Though a belief isn’t a authorized entity and may’t personal property, the trustees do. It’s taxed as if it’s a authorized entity on the highest provincial tax price the place it conducts its enterprise. The exception for a testamentary belief is made within the first three years, when you possibly can elect to have graduated property and marginal tax charges apply, though there isn’t the $15,000 fundamental private tax exemption.

A belief pays tax on the annual earnings, dividends and capital positive factors it retains within the belief. If the earnings, dividends and/or capital positive factors are paid out to the beneficiaries, it’s optionally deducted from the belief earnings, so successfully no tax is paid.

If some grandchildren are incomes earnings above the bottom tax bracket, there could also be an income-splitting alternative within the first three years. In Ontario, the highest of the bottom tax bracket is $51,466 and the tax price is 20.05 per cent. The belief may elect to pay the tax on the $51,466 after which give the cash to the grandchild with no tax penalties for them. There may be income-splitting advantages if the grandchildren have dependent kids.

Article content material

The 21-year deemed disposition rule you requested about is designed to forestall the long-term deferral of capital positive factors. Each 21 years, the belief belongings are deemed to be bought and the capital positive factors tax is utilized.

What you may do is switch the property out of the belief to the grandchildren earlier than the 21 years are up; the switch won’t set off capital positive factors. I ought to word that when or if the rental properties and dividend shares are initially transferred into the testamentary belief, there’s a deemed disposition and tax will apply.

What are your ideas, Maritia? Moderately than a belief, what if the cash went to you and your siblings, and also you then gave the cash to the grandchildren as you noticed match? I do know, you’d be answerable for the tax, however you will have the belongings to cowl the tax.

What for those who as an alternative gave them the cash with directions? They’d be answerable for the tax at their marginal tax charges. In case you are involved they could take the cash and run, you possibly can have a contract drawn up for them to signal agreeing to your circumstances.

Earlier than you do something, have a superb dialogue along with your lawyer and the monetary professionals in your life.

Allan Norman, M.Sc., CFP, CIM, gives fee-only licensed monetary planning providers by means of Atlantis Monetary Inc. and gives funding advisory providers by means of Aligned Capital Companions Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan may be reached at [email protected].

Article content material