If you had a nickel every time a lawyer in estate discussions invoked the much misattributed line about certainty of death and taxes, you would have lots of money in your estate to plan for. For the sake of my nickel, I’ll simply say one intersection of death and taxes is the testamentary trust and it may see some changes in coming years.
Trusts are legal vehicles where one person holds property for the benefit of another. Testamentary trusts are a subset created on death. An estate is a testamentary trust (executor holds property for beneficiaries); and likewise, any trust created by will (e.g., where property is held for minors or for a spouse during his or her lifetime).
Trusts are also taxpayers. Unlike most other trusts, testamentary trusts are taxed like individuals at graduated rates and pay tax based on its income level. The top rate is presently around 29%. Typically, a trust chooses to have income taxed either with the trust or with the beneficiaries and, as a result (depending on the trust’s terms and the anti-avoidance rules in the Income Tax Act designed to prevent abuse or misuse), in a manner that is advantageous to both given the graduated rates involved.
In the 2013 Budget, the Federal Government, concerned about the availability of graduated rates that would not otherwise be available but for interests in testamentary trust, has proposed replacing the graduated rate with a flat top rate by 2016. The proposal suggests a 36 month post-death period at graduated rates, which would provide an administrative window for many simple estates.
One concern is the potential impact on testamentary trusts designed to retain at least some income. Consider a trust that provides discretionary distributions to a beneficiary in order to preserve that beneficiary’s income from government disability support programs. The top tax rate may not be fair in these and similar circumstances and existing rules that would allow a trust to use the beneficiary’s tax rate may not necessarily apply.
The Federal proposal is in the consultation phase at this point so the parameters of any amendment remain to be seen.
Of course, estate planning and tax planning are not the same things. Tax considerations are just one of the factors in estate planning objectives. As the tax rules change, whether in 2016 or otherwise, it is useful to review regularly to make sure your estate plan remains consistent with your objectives. While death and taxes may be certain (ok, I owe you a nickel), the laws governing them can obviously change.