As you may be aware, the 2014 Federal Budget did not bode well
for the tax savings achieved through the use of testamentary
trusts. Currently, establishing a trust during someone's
lifetime (inter-vivos) results in income earned by the trust being
taxed at the highest marginal rate. In contrast, a trust settled on
the death of an individual (testamentary) allows for the use of
marginal tax brackets. Using a testamentary trust can result in
large tax savings.
The proposed legislation eliminates the use of marginal tax
brackets for grandfathered inter-vivos trusts, trusts created by
Will and estates. It's important to note that an estate created
on death will have a grace period of 36 months. This means that the
estate (or trust) will have access to the marginal tax brackets for
that period. At this time, the trust will be considered a
"graduated rate estate". The grace period of 36 months
was determined to be the time it will take to clear up all
administrative matters of the estate.
Other notable changes are: (1) testamentary trusts will no
longer be able to choose any year-end (they will all now have
December year-ends); (2) they will no longer be exempt from tax
instalments and (3) they will also not benefit from the basic
exemption when computing alternative minimum tax. These changes
come into effect January 1, 2016.
It is clear that the change to the legislation was prompted by a
desire to minimize the tax savings derived from the marginal tax
rates. Therefore, the question is whether or not using a
testamentary trust is still a useful tool in estate planning.
Speaking strictly from a taxation perspective the use of the
testamentary trust lost a lot its luster; however, there are still
benefits to using these types of trusts:
Grace period: For an estate (a trust)
established on death, the trust is still able to benefit from the
graduated rates for 36 months. Therefore, there will be some tax
savings available in regards to any income received within this
Control of the trust assets: While there are
no tax advantages to this, the use of a testamentary trust allows
the trustees to still maintain control of the assets within this
trust. For example, if Dad passed away, leaving a large sum of
assets to one of his minor children or a child who may not be
mature enough to make decisions, the trustee can still manage this
money until the age at which the child is responsible enough to
have access to it. All income can still be allocated to the child,
in order to benefit from the use of the child's marginal tax
brackets. Another example where this may be used is when one spouse
passes away and they want the surviving spouse access to the income
earned on the assets during the surviving spouse's lifetime,
but want the ultimate owner of the assets to be a child. By using a
testamentary spousal trust you can ensure this happens.
Disabled children: Leaving a testamentary
trust for a beneficiary who is eligible for the disability tax
credit is not subject to all the proposed changes. If the child is
receiving the disability tax credit, the trust will still have
access to the graduated tax rates. By allowing the trust the use of
the marginal rates, the income does not need to be reported on the
disabled child's tax return, thereby not impacting any social
assistance received by the individual.
Creditors: The use of a testamentary trust may
still be beneficial for holding assets that would otherwise be
exposed to creditors.
Marriage breakdown: Some parents are concerned
that leaving certain assets to their children will allow their
child's spouse access to this asset if there was ever a
breakdown in their marriage. However, the use of a testamentary
trust will allow the asset to be held by the trust and thus the
spouse may not have access to this asset in the event of a marriage
In conclusion, while the tax advantages of a testamentary trust
are not as lucrative as they once were, there are still good
business / family reasons for the use of these types of trusts
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Maltese tax law provides for rules which grant beneficiaries referred to as ‘Highly Qualified Persons' to be taxed at a reduced rate of tax of 15% on their employment income, provided certain conditions are satisfied.
Non-U.S. individuals making direct investments in the United States face a bewildering U.S. tax regime.
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