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Spousal Trusts in RRSP [256]

 Spousal trusts are effective estate planning tools for reasons that extend beyond tax planning. However, they may also be advantageous from a tax planning perspective. Rather than leaving all assets to a spouse, a portion of the assets may be bequeathed to a trust for his/her benefit. Income earned by the trust may accumulate and be reported by the trust on a separate tax return at graduated rates. This may be advantageous where the income would otherwise be taxable to the spouse at top marginal rates. After its fiscal year end, accumulated (tax – obligated) Income becomes capital and could be distributed as a tax – free capital distribution.

 

  Trusts for Children www.insuranceplancanada.com

Rather than bequeath the entire to a spouse and/or a trust for his/her benefit, part of the estate may be bequeathed to a separate trust for the benefit of the children, assuming that the children are young and that the surviving spouse would have to discharge the expenses out of after – tax dollars, this may be an attractive alternative. The trust would also benefits from graduated tax rates on accumulating income. If the testator is concerned that the parent may require the funds provision may be made for the parent to be a capital beneficiary and to receive the remaining trust property on the child reaching a certain age (e.g., age 25). This would enable the parent to use the income (and capital, if necessary) to finance child’s education and to have the balance of the capital available to assist the parent.

 Note: Draft legislation proposes that all estates and trusts (with the exception of new estates and testamentary trusts less than 36 months old) will be required to adopt a calendar year end commencing December 31, 2015. As well, for 2016 and beyond, all estate and trust income (with some exceptions) will become subject to tax at the highest marginal rate.

A Trust for Each Child www.insuranceplancanada.com

 Rather than bequeath the entire residue of the estate to adult children, a portion may be bequeathed to separate trusts for the benefits of each adult child, so as to enable part of the estate income to be reported on separate trust returns atgraduated tax rates rather than being taxable at the top marginal rates of the children. www.insuranceplancanada.com

Note: Draft legislation proposes that all estates and trusts (with the exception of new estates and testamentary trusts less than 36 months old) will be required to adopt a calendar year end commencing December 31, 2015. As well, for 2016 and beyond, all estate and trust income (with some exceptions) will become subject to tax at the highest marginal rate.

Trusts for Grandchildren

Rather than bequeath the entire residue of the estate (after the death of the parents) to children, part of the estate may be bequeathed to separate trusts for grandchildren. Each trust would benefit from marginal tax rates and would be able to deduct income paid or payable to the grandchild or allocated to him or her by means of the preferred beneficiary election. Such a trust would enable the parents to use no, or a low amount of, tax dollars to pay for the children’s annual expenses and to save up for their university education or to assist them in buying a home or a business. This would be preferable to bequeathing the assets to a business. This would be preferable to bequeathing the assets to a child who would be taxable at the top marginal rate and would then use after – tax dollars to pay for his/her children’s expenses. If equalization is of concern (the parent wants to treat each child equally), the will could provide for an add – back of the assets bequeathed to grandchildren trust. Each child would be entitled to an equal share of the grossed- up estate and would be considered to have already received the assets bequeathed to trusts for his/her children. www.insuranceplancanada.com

Note: Draft legislation proposes that all estates and trusts (with the exception of new estates and testamentary trusts less than 36 months old) will be required to adopt a calendar year end commencing December 31, 2015. As well, for 2016 and beyond, all estate and trust income (with some exceptions) will become subject to tax at the highest marginal rate. www.insuranceplancanada.com

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