Do new rules for trust taxation warrant a review?
For some people, even the thought of creating a Will casts a pall over their mood. Yes, a Will deals with a person’s death, but the broader process of estate planning is about caring for the most important people in your life, and having an up-to-date Will is central in that process.
But how do you know if you are really “up to date”?
While there’s no black-and-white answer to that question, there are principles that can be used as a guide. And within that inquiry, recent changes to the taxation of trusts may be sufficient to prompt a review and potentially a revision.
When to have a Will
Estate planning is about taking care of yourself now and in the future, and taking care of the people around you – now, in the future and when you are no longer there.
Sometimes the need for a Will is obvious: There is a significant other or a child, or a house or business with employees. Consider though a parent forced to deal with the intestacy of a twenty-something child, or an unanticipated large insurance payout or court award from an accidental death.
In my opinion, everyone who is legally capable of executing a Will should do so.
Having a Will provides certainty, not just about who will receive what, but also because it allows for tailored planning of when an inheritance will be distributed, and how the process will be managed. In this last respect, there is little ability to manage tax concerns without having worked through the issues ahead of time and having executed a Will designed to manage remaining contingencies.
When to review your Will
What then may prompt the review of a Will? (And when I say “prompt,” I am suggesting that a call to your lawyer may be in order to ask whether there is a need to discuss implications.) I would put it into the following three categories, in order of priority:
Changes to the people
- This includes you, a dependent, a Will beneficiary, an immediate family member (whether or not a beneficiary), an executor, or a trustee or guardian
- Beginning or end of a close personal relationship, whether or not legally married
- A birth, adoption, death, mental capacity concern or significant health event
- Immigration, emigration or change in citizenship
- A change in liability exposure, such as a bankruptcy, being joined in a lawsuit, signing a guarantee or starting a business
Changes to the property
- Sale of a large asset, especially if it is the subject of a specific Will bequest
- A windfall, such as an inheritance, court award or lottery prize
- A theft, loss or consumption, including a marked decline in or withdrawal from an investment account, especially for an RRSP/RRIF plan where a beneficiary designation factored into inclusion or exclusion of beneficiaries in a Will
- Ownership change or transfer, including loans or gifts to Will beneficiaries, a change to bank signing authority, or addition of a joint owner on investments or real estate
- Cancellation or loss of life insurance (for example, on retirement from employment) where the plan proceeds or a beneficiary designation factored into Will planning
Passage of time
Even if you and the property have remained effectively the same, the legal landscape may have shifted beneath you. It is difficult to say exactly how much time would be appropriate, but I would suggest no more than five years. The principal sources of law are as follows:
- Case law – Judicial decisions where the strategies, circumstances and facts may have relevance to your situation and planning decisions
- Provincial law – Changing legal entitlements and administrative processes, for example, Ontario creating a more stringent estate-administration tax-reporting regime and Alberta now treating a marriage as not revoking a pre-existing Will
- Federal law – Mainly changes to tax legislation that could have an impact on drafting Wills and on the administration of estates and trusts
Trust tax changes
First proposed in the 2013 Federal Budget and passed into law in 2014, as of the beginning of 2016, testamentary trusts have lost most of their previous tax preferences.
A testamentary trust is created under a person’s Will. Up to the end of 2015, such a trust was entitled to graduated-tax-bracket treatment, similar to an individual’s personal tax treatment. Though taxable from its first dollar of income, the trust would initially be subject to the lowest combined federal-provincial rate then work its way up through the tax brackets. As of 2016, the top federal-provincial rate – near or exceeding 50% in most provinces – applies throughout.
There are two key exceptions to the new rules, bringing two new acronyms into the lexicon:
- Graduated rate estate (GRE) – For the first 36 months of a deceased’s estate, graduated tax brackets will remain available. However, the rules are complex, and if not carefully navigated, the preferential treatment may be lost
- Qualified disability trust (QDT) – Ongoing graduated-tax-bracket treatment may be available to a testamentary trust with a beneficiary who is qualified for the disability tax credit
In the past, an estate-planning lawyer may have recommended the creation of one or more testamentary trusts and drafted the Will accordingly. Today, those trusts may have little or no benefit and may turn out to be an impediment to efficient estate administration. For those who have benefited from what was good planning in the past, it may be time to call the lawyer and discuss appropriate planning in this new environment.