Law Times

Page 12 October 21, 2013 Law Times • FOCUS Estate taxes Big shakeup as feds change rules for testamentary trusts BY MICHAEL McKIERNAN long-standing wills. But they'll be the lucky ones, according to Hull, since the changes would affect he federal government's new and existing estates when plan to eliminate graduthey come into force in 2016. ated tax rates for tes"It's very difficult for people tamentary trusts is the who have already set up trusts with biggest shakeup to hit estate planthis in place who are now stuck ning in a decade, according to a with a trust arrangement they can't leading practitioner in the field. just walk away from where it's be"It's a very big deal. For wealthy ing taxed at a rate they hadn't barclients in particular, most consider gained for. I'm not sure that's fair. it a central part of their estate planI'm hoping for some good transining," says Ian Hull, co-founder of tion legislation in there," says Hull. Toronto's Hull & Hull LLP. The federal government "In terms of the last 10 years, hinted at the change in its budit's the biggest change the governget in March and released more ment will have imposed." detailed proposals over the sumIf government proposals take mer for consultation ahead of effect as they currently stand, law- Donna Neff is hoping for an exception for the introduction of legislation on testamentary trusts that benefit people yers and clients may end up scram- with disabilities. the issue. The government curbling to change the structure of rently taxes testamentary trust For Law Times T Estate Planning Will & Trust Planning Incapacity Planning Trust & Estate Administration Estate Litigation Legal Opinion Work Advice to Executors, Trustees & Beneficiaries O'Sullivan Estate Lawyers Professional Corporation Ernst & Young Tower, Toronto-Dominion Centre 222 Bay Street, Suite 1410, P.O. Box 68, Toronto on m5k 1e7 www.osullivanlaw.com Tel 416-363- 3336 Fax 416-363- 9570 RANKED IN TOP 5 Trusts & Estates Boutiques in Canada 2012 Untitled-1 1 income on the same graduated scale applied to individuals. It starts at 15 per cent for income under $43,561 and increases to a top rate of 29 per cent for income exceeding $135,000. Other types of trusts are subject to the 29-per-cent rate on all income. Explaining the rationale for the move, the consultation document says "the taxation of testamentary trusts and grandfathered inter vivos trusts at graduated rates effectively allows the beneficiaries of those trusts to access more than one set of graduated rates. This tax treatment raises questions of both tax fairness and neutrality in comparison to the treatment of beneficiaries of ordinary inter vivos trusts and taxpayers receiving equivalent income directly." The proposal reveals the government's concern about the extent of tax planning around the use of testamentary trusts. It notes graduated rates created opportunities including "the use of multiple trusts, tax-motivated delays in completing the administration of estates, and avoidance of the Old Age Security Recovery Tax." "The tax benefits arising from tax planning of this nature raise questions of fairness, and negatively affect government tax revenues," the proposal states. As of 2016, the federal government plans to give estates a "reasonable period of administration" of three years when the graduated rates will apply. After that time, they'll move to the top marginal rate. Any trusts created by the will begin paying the top rate immediately. Despite the upheaval he expects the amendments will cause, Hull admits the tax regime for testamentary trusts always felt a little too good to be true. The proposed changes would bring testamentary trusts in line with their inter vivos counterparts: trusts set up by people during their lifetime that lost their graduated rate status back in 1972 under previous tax reforms. "I never really understood why testamentary trusts were treated so favourably. I understood why rich people used them, but from a policy standpoint it was a bit confusing that they've been embraced this long," says Hull. Interested parties have until Dec. 2 to make any concerns known. Donna Neff, who runs the Neff Law Office Professional Corp. outside Ottawa, is hoping for an exception for testamentary trusts that benefit people with disabilities. She estimates at least half of her clients currently take advantage of testamentary trusts for the care of a family member with a disability in order to stay within the financial eligibility requirements of the Ontario Disability Support Program. "You have to set up a trust because otherwise you risk losing support payments and you don't necessarily want assets in the hands of someone if it's a mental disability that means they can't handle money," says Neff, noting it would be relatively easy to carve out the exception by requiring that trust beneficiaries receive disability benefits in order to keep taking advantage of graduated rates. "A lot of people think it's just wealthy people who set up trusts. The families I'm dealing with don't tend to have a lot of money in the trust to begin with but they're trying to preserve as much of it as possible to help a child and it would be good to give them some help," she adds. Dineen Beath, who works in the Ottawa office of LaBarge Weinstein LLP, says that while the tax effectiveness of testamentary trusts will drop as a result of the changes, there are still enough incomesplitting, creditor protection, and other benefits to make them worthwhile for most testators. "For instance, if you have young kids and a sizable estate, you might not want them to have access to a large amount of money all at once. Or if you're concerned that a child is not responsible with money, you can set up a trust instrument so that they only get portions of the estate at certain dates — maybe a third when they're 25, another third when they're 30, and the balance when they're 35," she says. LT 13-10-17 8:58 AM CANADIAN LAW LIST 2013 YOUR INSTANT CONNECTION TO CANADA'S LEGAL NETWORK Inside you will find: of more than 58,000 barristers, solicitors and Quebec notaries, corporate counsel, law firms and judges in Canada; for the Supreme Court of Canada, the Federal Court of Canada, Federal Cabinet Ministers, departments, boards, commissions and Crown corporations; Untitled-2 1 related to each province for the Courts of Appeal, Supreme Courts, County and District Courts, Provincial Courts, law societies, law schools, Legal Aid, and other law-related offices of importance. 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