Wills and estate planning for thousands of Canadians could be affected in 2016 if the government proceeds with their intention to eliminate tax benefits that arise from taxing testamentary trusts and estate grandfathered inter vivos trusts, created by wills and estates at graduated rates, after a reasonable period of administration for estates.
In the March 2013 federal budget, the government announced it would consult with stakeholders on, among other things, subjecting testamentary trusts to tax at a flat rate equal to the top rate of combined federal and provincial tax for individuals. Estates would also be subject to this flat top-rate taxation starting immediately after the 36 months that follow the individual's death (top-rate estates). Estates could therefore retain access to graduated rates for up to the first 36 months of their administration.
The proposed measures would not change the preferred beneficiary election rules that apply to trusts for disabled beneficiaries or the rules that apply to trusts for certain minor children or to the rollover rules applicable to spousal trusts and common-law partner trusts.
What is a Testamentary Trust? It is literally a trust in a will that arises upon a person's death. It is created to address any estate accumulated during that person's lifetime or generated as a result of the death itself. The trust can be created to oversee assets from life insurance policies or other assets accumulated during the person's lifetime. A trustee is appointed to direct the trust until a set time when the trust expires, such as when the beneficiary's children reach a specified age, etc.