Estate planning is about life now and in the future. More importantly, estate planning is about the life of your family, your loved ones and the peace of mind you gain.
There are 2 main types of trust as follows:
A testamentary trust is created in your will and takes effect upon your death. The assets relating to a testamentary trust form part of your estate, so they are subject to any estate taxes that apply. The trust can be changed at any time before your death by simply having a new will prepared.
When you establish a living trust (also known as an inter vivos trust), property ownership is passed immediately to your beneficiaries. You can add more property to the trust over time. These trust assets do not form part of your estate and are not subject to probate as this is completed in your lifetime.
The decision on whether to set up a living trust or a testamentary trust depends on many factors, including your need for the assets during your lifetime. A professional adviser such as a CPA or a lawyer can advise you on the best strategy for your specific estate planning needs and goals.
Whether it’s best to establish a trust during your lifetime or upon your death will depend on the intended use and your personal situation.
- You have children from a previous marriage
If you remarry, a trust can provide support for your spouse during their lifetime, while ensuring that your children from a previous marriage eventually inherit any remaining assets.
- Your spouse lacks financial expertise
If your spouse needs help with money management after you die, a testamentary trust allows a qualified trustee to manage the trust assets on behalf of your spouse.
- Your spouse or child is disabled
A trust can be used to ensure a disabled spouse or child receives an appropriate level of care and has sufficient assets to maintain this care after you die.
- You want to provide a gift to minors
You can use a trust to provide income to minor beneficiaries (for example, children or grandchildren) in their younger years and to pay out the capital when they reach a specified age.
- Tax planning
Income earned in an inter vivos or living trust is taxed at the highest marginal tax rate, but any trust income that is distributed to adult beneficiaries is taxed in their hands. So if your beneficiaries are in a lower tax bracket, the investment income can be taxed at their lower rate.
Beginning in the 2016 tax year, testamentary trusts are no longer able to enjoy graduated tax rates. Instead, income earned in a testamentary trust is taxed at the top personal tax rate. As a result, there is no longer an opportunity to pay less tax by retaining income in a testamentary trust before paying it out to beneficiaries in the top tax bracket.
However, an estate that arises upon death and is a testamentary trust will be able to use the graduated rates for 36 months from the date of death.
- You want to provide a future gift to charity
You can use a trust to provide trust income to your beneficiaries for their lifetime. Upon their death, the remaining money in the trust is donated to the charity you have specified.
- You want to bypass probate
With a living trust (but not a testamentary trust), you bypass probate for any assets held in the trust, and ensure that the assets are transferred and distributed as per your intention. This also offers greater privacy for trust assets, as probate is a public process and anyone can access these records.
If you own any US property or investments, there are US estate taxes that you must consider. US estate taxes can be quite complex and require professional expertise. The following is a partial list of potential methods to reduce US estate taxes:
- Use life insurance to cover the US estate taxes, allowing your total estate value to be maintained
- Sell your US assets prior to death. This is the simplest method of not paying this tax, but timing is everything with this strategy as the sale could result in an immediate Canadian tax liability
- Individuals with substantial US holdings may wish to consider using a Canadian holding corporation since the assets would be owned by the Canadian corporation and not by the individual
- Reduce the value of your estate below the current threshold
- Hold Canadian mutual funds that invest in the US market. While the fund may hold US assets, it is considered a Canadian asset, and is not subject to US estate tax
- Hold the asset in joint ownership. This may serve to defer the tax until the other owner dies, assuming the surviving owner can prove that he/she acquired their portion of the asset using their own capital