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Wills & Graduated Rate Estates

Effective January 1, 2016, substantial changes will be made to the tax treatment for Estates and Trusts.

Currently, a trust created under a will (a “testamentary trust”) is eligible for the same graduated rates of tax as are individual persons. An election is available to tax income in a trust to take advantage of those graduated rates. A testamentary trust may choose a year end other than a calendar year end and is not required to make tax instalments. The deceased person is considered to have made charitable donations in the year of death to the extent the will provides for them. There are also other exemptions and benefits available.

For deaths occurring after 2015, all of the basic rules outlined above become obsolete. Only a “graduated rate estate” (“GRE”) will be eligible to claim donations on the final tax return (and for the year prior to that) of the deceased. Only a GRE will be eligible for an off-calendar year and graduated tax rates. Only a GRE will be eligible for certain tax planning benefits like an election under Section 164(6) of the Income Tax Act of Canada, which eliminates double-tax issues on estate assets. Note that the maximum life-span of a GRE is the first 36 months after death and there can be only one GRE. Except to the extent that a trust has losses, the election to retain income in a trust is eliminated.

There are a number of technical aspects to meet in order for an estate to qualify as a GRE. Since many estate plans rely on the ability to utilize certain elections under the taxation acts or claim charitable donations, it is very important that the wills governing those estates be drafted in a manner consistent with the creation of a GRE. Therefore, we suggest that you review your will with your Fuller Landau tax advisor to identify any changes required.

Additionally, the new rules provide that where a spousal trust exists, the tax liability on those trust assets arising at the spouse’s death will become the liability of the spouse’s estate primarily, with the trust created by the original deceased person’s will having only a secondary exposure. This results in a shift of the tax burden which may have the unintended consequence of impoverishing the spouse’s own beneficiaries for the benefit of a different set of beneficiaries of the deceased. As there is no grandfathering to protect currently existing spousal trusts from the effect of this rule, it is important to review existing situations to determine whether any planning measures need to be adopted. Where wills provide for the creation of a spousal trust for a future death, it is paramount to review the planning and make any necessary adjustments.

With the elimination of the graduated rates of tax, wills that provide for trusts for children should also be reviewed.  In addition, planning for a disabled beneficiary has also been affected by changes to the estate rules and is certain to require modifications.

The changes to the tax laws in the wills and estates area are extremely complex, so we invite you to contact your Fuller Landau advisor who will answer your questions and ensure your will and estate planning strategies are uniquely designed to meet your personal goals.

The Minister of Finance has recently indicated that additional changes to the above rules will be forthcoming.

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