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 The
Money Management Newsletter: RSP
Planning
Income-splitting using testamentary trusts
By AIM / Trimark Investment Management Inc.
A Companion Advisor Article
If
you're considering leaving an income-producing inheritance to someone,
putting part or all of it in a trust instead of giving it directly to
your beneficiary can impact the family tax bill.
Sharing the income
(income-splitting) between a testamentary trust (established upon your
death through your will) and your heir is a good way, when planning your
estate, to save tax, especially if your heir is already to a high tax
bracket. A testamentary trust pays tax on any income generated that is
not paid out to beneficiaries.
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You
can leave more!
| You
and your spouse are both successfully employed, and are currently
paying tax at the top marginal tax rate (50% ). If you died and
left your investment portfolio to your spouse, the annual tax bill
would depend on whether you left the portfolio directly to your
spouse or created a testamentary spousal trust under your will.
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Direct
inheritance
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Testamentary
trust
|
| Value
of portfolio |
$750,000
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$750,000
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| Annual
rates of return |
8%
|
8%
|
| Annual
income |
$60,000
|
$60,000
|
|
Total
taxes (approximately)
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$30,000*
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$20,000**
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| Savings
realized (30,00 - $20,000) = $10,000 annually |
| *
Based on marginal rate of 50% ** Based on gradutated tax rates |
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The income in the testamentary
trust can be taxed in the trust according to the same graduated income tax rates
that apply to individuals. This means that the marginal tax rate will vary,
depending on the total taxable income of the trust. Income earned by a testamentary
trust can be taxed in the hands of the trust, or in the hands of the beneficiary.
This gives your heirs some opportunity to income split with the trust.
There is no benefit in establishing
more than one trust for any - individual, as all trust income could be taxed
together as if only one trust existed.
If you have a number of
beneficiaries, your Will can instruct that individual testamentary trusts be
set up to hold each beneficiary's portion of the inheritance Each trust would
have a taxable income based on one portion.
There is a limit to the
number and size of trusts you should establish, because there are legal and
administrative costs involved in setting up trusts, plus there may be costs
for ongoing management.
If your estate is small,
one or two testamentary trusts naming multiple beneficiaries may be the best
choice. Talk to your financial advisor about the best strategy for you and your
family and ensure you obtain professional legal advice.
GETTING ADVICE: A will and or trust arrangements requires careful planning
to ensure all essential matters are covered. It should also be reviewed periodically
and discussed with a qualified adviser or team of advisers to incorporate any
changes in your personal circumstances.
Notice: Fiscal Agents Financial Services Group are not engaged
in rendering tax, accounting or legal professional services or advice. The comments
in this article are not intended, nor should they be relied upon to replace
specific professional advice. Before acting on material contained herein. Readers
should seek advice that is appropriate to their personal circumstances from
a professional advisor.
We gratefully acknowledge the contribution of this article
from AIM/Trimark Investment Management Inc.
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Questions about the above send e-mail to:
moneyman@fiscalagents.com 
© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905)844-7700
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