Trusts in a Will
Trusts In A Will Mean Tax Savings
Tax savings can be achieved by using trusts in your Will. A trust created in a Will, called a "testamentary trust” pays tax at the same graduated marginal tax rates as an individual. This means income can be taxed at lower rates in the trust, permitting "income splitting” with a beneficiary whose income from other sources has pushed them into a higher tax bracket. The income can even be paid to the beneficiary, and still be taxed in the trust at the lower marginal rates.
Spousal trusts are often created in the Wills of a married couple to permit income splitting during the lifetime of the surviving spouse. The saving can be as much as $10,000 per annum. The surviving spouse would be the sole beneficiary of income, and there can be an unrestricted right to the capital as well. The surviving spouse can also be the trustee, usually with one or two other individuals.
A spousal trust can create an income splitting opportunity, or help preserve or increase the tax savings from income splitting already in place. For example, during the lifetime of a married couple, both the husband and wife have access to the lower marginal tax rates. However, when one dies, the tax will be calculated on the same income – but in one tax return instead of two. As a result, the tax bill will increase – potentially by as much as $13,000 per year! A spousal trust can preserve up to $10,000 of the tax saving from income splitting between spouses.
Professional advice is essential to help you consider whether using trusts is appropriate for your estate plan. Your advisor can also help implement any necessary changes. For example, a new Will is required. You may also need to change the ownership of joint investment accounts, and the beneficiary designation for life insurance.
The comments included in this publication are not intended to be a definitive analysis of tax law. The comments contained herein are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
All insurance products are offered through BMO Nesbitt Burns Financial Services Inc. by licensed life insurance agents, and, in Quebec by financial security advisors.