Minden Brief: A Whole New World – Time to Revisit Your Will (and Trust) Planning

Written by Michael Goldberg, Partner

In 2013, the Department of Finance proposed to eliminate most tax benefits that have traditionally been available to certain trusts formed on the death of an individual (in this article referred to as “Testamentary Trusts”) so that Testamentary Trusts, which include an individual’s estate, as well as trusts created under the terms of an individual’s will for his or her spouse and/or other persons, would be taxed in a manner similar to trusts that are not Testamentary Trusts. 

Notwithstanding much critical commentary, the 2014 budget announced plans to implement the proposals.  By December 16, 2014, Bill C-43, Economic Action Plan 2014 Act, No. 2, was enacted as the law of the land, though its application in connection with Testamentary Trusts will be delayed until 2016. 

As bad as the original proposals were thought to be, the final legislation  not only implemented the proposals but went far beyond their original scope in ways that will broadly and generally negatively impact traditional will planning as well as planning involving so-called “life time trusts” (these are self-benefit trusts, alter ego trusts and joint partner trusts, but are not ordinary discretionary family trusts typically set-up for an estate freeze or other planning). 

Although there is no way to adequately address the legislative changes in this article, some of the more critical changes impacting Testamentary Trusts are highlighted below:

1. the income of a Testamentary Trust that is a spousal trust in the year of death of the beneficiary spouse will be deemed to be the income of the deceased beneficiary spouse and not the spousal trust. This rule may result in significant inequitable consequences in situations where the deceased beneficiary spouse’s heirs (who effectively end up paying the tax) are different from the residuary beneficiaries of the spousal trust (who will receive the assets of the spousal trust);
2. access to many traditional tax saving testamentary tax planning practices will only be available to a “graduated rate estate” (“GRE”).  Only estates of deceased persons that meet certain criteria can qualify as GREs and GREs can only last to the first 36 months of a qualifying estate.  Other Testamentary Trusts, such as spousal, family or insurance trusts formed under a decedent’s will will not qualify as GREs, though certain trusts formed under a will for the benefit of disabled persons will, with limitations, be able to qualify as GREs; and
3. the ability of a Testamentary Trust to enjoy the annual savings that come from being taxed at graduated tax rates (about $23,000 on the first $135,000 of income earned in Ontario in 2014) will only be available to GREs, which ,as noted above, can only exist for the first 36 months of a qualifying estate.

Another significant problem with Bill C-43 is that it was enacted without provisions that would “grandfather” situations where wills can no longer be changed, for example, because the maker of the will is dead or incapacitated. Consequently, in these situations it may not be possible to take any steps to address the legislative changes, which could give rise to adverse tax results and, in some situations, potentially lead to unnecessary litigation.

We are here to help. To identify how this legislation may impact your estate and succession plans, you should consider reviewing your wills (particularly if they contain spousal trusts) with your tax and/or estate advisors before Bill C-43 comes into effect on January 1, 2016. Also, since the changes enacted in Bill C-43 will impact lifetime trust planning, if you have employed such trusts in your planning you should meet with your advisors to review whether those trusts will continue to meet your planning needs. Michael Goldberg can be reached by phone at 416.369.4317 or at mgoldberg@mindengross.com.

This article was previously published in the January 2015 edition of The Estate Planner by Wolters Kluwer.