It can be extremely difficult to discuss with your loved ones what you would like done with your assets upon your death. One planning option to minimize tax and maximize control is to create a testamentary trust. This type of trust is created when an individual – known as a testator – passes away and indicates in their last will and testament that they would like some or all of their assets to be held in trust for their beneficiaries.

One of the benefits of a testamentary trust is potential tax savings.  Where income earning assets are held by a testamentary trust the income is taxed using the graduated personal tax rates. These rates start at 20%.  This is advantageous because if a beneficiary were to receive funds directly from the deceased, this income would be added to their own income.  This often results in higher taxes since tax rates increase as a person’s income increases. The benefit is particularly high, as much as 28%, where the beneficiary is taxable at the highest marginal tax rate. If you anticipate leaving significant income earning assets to your beneficiaries you can realize tax savings and increase control by transferring them to a testamentary trust on your death.

Another benefit is that it will allow your wishes to be carried out after you have passed. You can specify in your will how you would like the income and capital of the trust to be administered for the duration of the trust.  It can be helpful to set up a testamentary trust for children and/or grandchildren if you want to ensure they have enough funds for post-secondary education, to protect a spendthrift child from themselves, to provide financially for a disabled loved one, or create an ongoing charitable legacy. This type of trust can also be used to hold a beloved property such as a cottage that you would like to keep in the family. You can establish terms of use and provide for the upkeep for the property through the trust.

There are costs associated with having a testamentary trust, such as trustee and accounting fees. Trustee fees may be required to be paid if a professional trustee is employed. Accounting fees are necessary as a trust must file an annual income tax return. As a result a testamentary trust needs to earn sufficient income to generate enough tax savings to offset the costs associated with administration of the trust.

Knowing that your loved ones will be protected and your wishes carried out can outweigh the difficulty of discussing and planning for your eventual passing. To discuss whether a testamentary trust is right for you please contact a Millards representative at (519) 759-3511.