Trusts: the new reason to review your Estate plan

In the past three years, B.C. law has changed more significantly (and perhaps dramatically) than in any other such period in our history.

The Family Law Act, the Wills Estates and Succession Act and the Limitation Act have all been proclaimed. That isn’t all of it, either.

I often wonder how practicing Lawyers, especially in smaller firms, are expected to keep up. Such change, in such a short time, is important for every British Columbian.

Although perhaps not immediately, chances are that at some point, new law will directly affect everyone.

The latest major change, this one at the Federal level, was announced last year and goes into effect January 1, 2016. So this year, again, we have to revisit our Estate plans.

What is it this time?
CRA has announced that the tax treatment of Testamentary trusts (generally meaning trusts created in Wills) will now change.

So if you have made a Will or are thinking of it, and if your Will has or will benefit children or grandchildren through the use of a Trust, listen up.

What happens now?
Until now, trusts have been put in Wills for various reasons. For some families, it was to create financial security for a child or grandchild who could not manage money, who had an addiction or who was too young to receive an “outright” gift.

Some trusts last for life, and others last for specific periods. Trusts are legally persons and so, among other things, they have to file tax returns once they come into existence.

In Wills, trusts don’t come into existence until the person making the Will dies. But when that happens, the trust is created and is then typically put into play in a bank, credit union or other financial institution. Money is then transferred from the Estate (via the Will) to the financial institution.

In the past, money sometimes accumulated in the trust for the benefit of the beneficiary (the person receiving the income from the invested trust money). An example of this is the trust for a grandchild who is under the age of nineteen (thus a minor).  Money is not advanced to the minor because usually the terms of the trust didn’t allow it, until the minor became an adult.

Up to this point, money kept in a trust has been taxed at what is called a “graduated” rate (which has nothing to do with high school or university graduation, by the way).

That means that the funds earned in the trust that aren’t distributed to the beneficiary (the beneficiary, in our example, being too young) are taxed at the same rates that you and I are taxed at for income earned over the year. And money distributed to the beneficiary, say, once (s)he became older, would then just be added to the beneficiary’s income and taxed normally.

What’s coming?
Starting next year, any money accumulated in a Testamentary trust will be taxed at the highest rate, based on your province’s rate. In B.C., our highest overall (Federal and Provincial) tax rate is roughly 43%, if you earn enough income to get into that bracket.

But with Testamentary trusts, regardless of how much income is earned in the year, it will be taxed here in B.C. at 43%.

This change will not apply to people who are disabled beneficiaries of trusts. The “graduated” rates will continue to apply.

Also, it appears that the Federal government will allow a “hiatus” period where, for the first three years following the death of the Will maker, the trust set up in the Will will continue to be subject to graduated rates of tax, rather than taxed at the top rate.

Summary
This is not the full changes the government has made, so see your advisor if you have made a Will that contains a trust. If you are not sure about your Will, see your legal advisor.

The way I see it, Estate plans and Wills should now be revisited and reconsidered. There are other reasons than tax reasons to make trusts in your Estate plans.

For many people, the questions cannot be answered easily. The question is whether there are alternatives to making Testamentary trusts that will impact your beneficiaries.

Making holding companies, Estate freezes and Alter ego trusts may now become more in vogue for families. Maybe, in our low-interest environment, there won’t be so much money accumulating in trusts, such that the changes in the tax rules won’t make that much of a difference.

Give it some thought, and sit down with your advisors. Don’t leave this.

This ad ran in the Richmond Review on May 6, 2015.