What is a testamentary trust?
A testamentary trust is one that arises as a result of a death. A testamentary trust, including a Henson trust, can be included in a will or in a separate document.
Testamentary trusts have been a popular estate planning tool for many years because of the favourable tax treatment they have historically received. Effective January 1, 2016, most testamentary trusts will no longer enjoy the benefit of graduated tax rates but will be taxed at the top rate. Without question, the tax benefits of having a testamentary trust will be significantly reduced.
Are any trusts exempt from the new rules?
Yes, but only if very specific conditions are met. What we in Ontario often refer to as Henson trusts (or other types of qualified disability trusts or QDTs) may be exempt from the top tax rate. However, to meet the requirements for a QDT, the trust beneficiary must qualify for the federal disability tax credit (DTC) and must maintain that qualification if the trust is to benefit from graduated tax rates. It is important that the Henson trust or QDT not include other beneficiaries who do not qualify for the DTC.
Why are testamentary trusts still worth doing?
Although the taxation of testamentary trusts is changing, trusts continue to be an important estate planning tool. You may want to consider testamentary trusts in your estate planning:
• To provide for spendthrift beneficiaries or for anyone who isn’t good at handling money,
• In a blended family situation, to ensure that children from a previous relationship will inherit something and, at the same time, provide some financial assistance to a spouse who is not related to your children,
• To provide for a beneficiary with a disability (who might also be a recipient of Ontario Disability Support Plan (ODSP) benefits),
• To provide for a beneficiary who may be struggling with addictions,
• To provide income splitting opportunities between a beneficiary and his or her family (spouse, children) to reduce the family’s overall income tax liability.
A testamentary trust can give your trustee (the person administering the trust) control over the timing and the amount of payments to beneficiaries while also providing tax savings. If the income of the trust is payable to a beneficiary in a low income tax bracket, the trust can still deduct the income which will then be taxed at the beneficiary’s lower tax rate.
If you want to explore whether testamentary trusts should play a role in your estate planning, email email@example.com or call 613.836.9915 to make an appointment to meet with me. Together, we will review your unique situation and estate planning goals to see if testamentary trusts and Henson trusts can work for you and your family.
Reproduction of this blog is permitted if the author is credited. If you have questions or if you would like more information, please call us at 613 836-9915. This blog is not intended to be legal advice but contains general information. Please consult a lawyer or other professional to determine how the information in this blog might apply to you.
Blog posts pre-dated December 1, 2015 were originally published under Neff Law Office Professional Corporation.