Until 1988, the Income Tax
Act required that any income earned by an estate be allocated
to beneficiaries after the first two years. In 1988 the Act was
amended to permit estates and trusts to pay income taxes
within a trust. As a result, testamentary trusts (trusts
established by your Last Will and Testament) have the potential
to permit your beneficiaries to save substantial amounts
of income tax long after your death.
INCOME
SPLITTING WITH THE ESTATE
Many couples have arranged
their affairs so that they are able to split their income
during their lifetime. For example, if each spouse had taxable
income of $30,000.00, their total tax would be $12,240.00.
If one of the spouses died, the surviving spouse would have
an income of $60,000.00 and the tax bill would be $20,385.00.
If the assets were left in the estate so that the estate
generated income of $30,000.00 per year, and the surviving
spouse continued to pay tax on his or her regular income,
the saving, by splitting income with the estate, would be
approximately $6,098.00 per year. The higher the income of
the couple, the greater the saving. If, for example, both
spouses have incomes of $50,000.00, the saving by income
splitting is approximately $11,100.00 per year. Not only
does income splitting with the estate reduce tax, but by
reducing the survivor’s income it may
also prevent the clawback of Old Age Security. These savings
are available to all other beneficiaries as well.
MULTIPLE TRUSTS
If
you are a very high income earner, it is possible to establish
multiple trusts so as to multiply the number of times a taxpayer
can take advantage of the graduated rates of taxation on the
first $29,000.00 of income. For example, if a spouse’s income
was $50,000.00 and the tax payer’s income was $125,000.00, and
if all the income went into the name of the surviving spouse
on the death of the taxpayer, the total tax bill would be
$80,000.00 per year. If left to a multiple trust, which the surviving
spouse could access, the annual saving in income tax would
be close to $30,000.00 per year! |
FAMILY
TRUSTS FOR SURVIVING CHILDREN
A testamentary trust will is also used to create testamentary
family trusts for surviving children who already have taxable income.
If left to a separate trust for each child or beneficiary, the child
could choose to shelter the income in the trust to take advantage
of the lower rates of taxation, or even allocate income to one of
his or her own children to avoid paying any tax whatsoever! If the
child ever needed the capital, s/he could wind up the trust and remove
the funds.
JOINT
TENANCY PROPERTY
When property is placed in joint names, the property
does not form part of the estate. The usual reason for placing
property in joint names is to save on the cost of estate administration.
The cost of administering an estate less than $500,000.00 is between
1.6% to 2% for lawyers fees, and 0.7 of 1% for government probate
fees. Estates larger than $500,000.00 cost proportionately less.
Recently there has been an abundance
of well-intentioned bankers, friends and family advising people
to place all assets into joint names with one spouse - and in some
cases, children - to avoid probate costs. However, with the saving
available on income tax through proper estate planning, one can
frequently pay for the costs of estate administration with the
saving on income tax in the first year alone! If property is placed
in joint names, it is not possible to effect this saving because
jointly held assets do not form part of the estate and thus income
cannot be split.
CONCLUSION
If your beneficiaries earn in excess of $29,000.00 per year,
there are substantial savings on income tax for your beneficiaries
long after your death, through testamentary trusts. Should you
wish to review your situation to determine the amount that could
be saved through an estate or a testamentary trust, we would be
pleased to assist you. |
