The taxation of estates, testamentary trusts and certain
"life interest trusts" such as alter ego, joint partner
and spousal trusts, and the rules for charitable donations made on
death through an estate are changing significantly on January 1,
2016. These initiatives flow from previously announced budgets, and
will cause changes to previously established estate plans, wills
This client update is an attempt to summarize the more
significant aspects of the rules. However, there is a great degree
of complexity caused by these changes, and it is important for
individuals to seek advice specific to their circumstances. The
primary aspects of these changes are set out below:
Testamentary trusts (trusts that are
established in a will and arise as a consequence of death of an
individual) will now be taxed at the high marginal tax rates for
income retained in the trust (currently testamentary trusts are
taxed at the graduated tax rates) – this significantly
curtails the opportunities to use testamentary trusts for pure tax
planning (although many non-tax estate planning reasons for such
One exception to this is the
"graduated rate estate" ("GRE") which will
continue to obtain the benefit of graduated rates for 36 months
after the date of death.
Testamentary trusts established for
the benefit of a disabled individual (a qualified disability trust)
will also continue to obtain graduated rate taxation.
Existing testamentary trusts will
have a deemed year end on December 31, 2015, and all testamentary
trusts (except GREs) will have to have a calendar year end going
Only GREs are eligible for certain
tax planning provisions related to loss carry backs (which are
particularly relevant with private company shares) or utilize the
new estate donation rules (including the continued elimination of
taxable capital gains on donations of marketable securities to
Life interest trusts will now have a
deemed year end at the end of the day of death of the life
beneficiary and all income (including realized capital gains on
that deemed disposition) will be deemed payable to the life
interest beneficiary and taxable by his or her estate – this
shifts the tax burden from the life interest trust to the estate of
the life interest beneficiary which is a significant change, and
particularly problematic for second relationship, blended family
and family-controlled business situations.
Strategies do exist to avoid this
mismatch, but revisions to existing trusts are required for those
to be implemented.
A court ordered variation of
irrevocable trusts might be required.
The new estate donation rules give
greater flexibility for those persons who wish to make charitable
donations on death – as long as the donation is made by a GRE
within 36 months of the date of death, the charitable tax receipt
can be carried back to reduce 100% of taxes in the year of death
and the year immediately preceding, or 75% of the taxes in the
three years of the estate itself or a five year carry forward in
the estate, but the donor must be a GRE.
The new donation rules do not apply
to gifts by life interest trusts, so the possibility of charitable
giving through life interest trusts has been fully eliminated.
These rules are extremely significant and affect a great many
different estate planning scenarios. We would encourage everyone to
review their wills, testamentary trusts and life interest trusts
with their professional advisors to determine what changes may need
to be made at this time to address these new rules.
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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