New trust rules: what you need to know

Dominique Bigras, lawyer and trust manager, Trust
Services for Individuals, Desjardins Group

Marie-Christine Daignault | Desjardins Group

Ottawa is about to adopt new tax rules for testamentary trusts. Since the early 2000s, trusts have grown in popularity and have been advocated by wealthy people who saw the benefits of investing assets in a separate legal entity for their tax and wealth management needs.

Dominique Bigras, a lawyer and trust manager with Trust Services for Individuals at Desjardins, explains how these rules could affect you.

Q1. What are Ottawa's new rules going to change?
Currently, testamentary trusts are taxed at an individual's progressive tax rates. But effective January 1, 2016, the capital gains, income, interest and dividends will be subject to the highest marginal rate for individuals (i.e., 49.97% in Quebec).

Testamentary trusts now have the same restrictions as those imposed on inter vivos trusts, which have already been subject to limitations for a number of years.

Q2. Are inter vivos trusts still useful for reducing taxes?

Yes, they're a tax-savings vehicle. Although these trusts are less popular now than they were a few years ago, they're still useful. You can split trust income with your adult children. The amendments that the federal government is making specifically affect tax rules for testamentary trusts.

Q3. What are the advantages of a testamentary trust today?
Testamentary trusts are still an excellent tool for managing wealth after death, especially in blended family situations--which is common in today's society. If you have children from one or several marriages, a testamentary trust also gives you better control over the property that's bequeathed to your spouse in the event of your death.

Let's take an example of a man who has a large estate. He marries, has children, divorces and remarries. He would like his current spouse to be provided for after his death. But after his current spouse dies, he wants to ensure that his estate goes to his children because his current spouse might get remarried, for example. Who's to say that she won't want to bequeath all her deceased spouse's property to her new spouse? In this case, the deceased man's children will no longer be able to access the initial estate.

A testamentary trust could be the perfect tool in this situation.

That way, the spouse doesn't personally inherit the estate of her deceased spouse. Instead, she's provided for because she is named as a beneficiary of the trust and receives income from the trust, although she may not be able to access the capital. This capital then remains in the trust until she dies. After her death, depending on her deceased spouse's estate plan, the assets may be transferred to his children, either directly or through another trust (if the children are minors, or have reached the age of majority but are deemed to be too young to be fully responsible for the significant amounts of money).

Q4. What is the minimum estate amount required to be eligible for a trust?
Desjardins Trust requires a minimum of $250,000, as well as property holdings. By having a minimum amount, it makes the product beneficial and ensures that management fees remain low.

That being said, if you have young children, you can have a trust with less equity. The trust ensures that the guardian has not to report to the Curateur public and that you have better control over your wealth.

Q5. What other kinds of trusts do you recommend?
Although they are rather unknown, foundation trusts are an attractive option for those who want to make charitable donations and be recognized as a donor. The foundation trust may be designated as a charitable organization by the Canada Revenue Agency. The foundation trust allows certain amounts to be transferred into a trust for a registered charitable organization.

In these cases, people usually form non-profit organizations, but a trust may be more relevant. Establishing a foundation trust allows you to appoint a trust company as a trustee and to provide legal and tax expertise on how it's managed.

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