Put Trust Into Your Financial Plans
February 10th, 2017
Regardless of your age, you should be planning financial goals. One of the most efficient ways is through trusts that can help save tax dollars and provide for your heirs.
Here are just some of the ways trusts can be used to maximize your wealth:
Support for Your Spouse
You can set up a trust (as provided by your will) to supply a source of income for your spouse and defer taxes. Property transferred to a spousal trust on death does not trigger capital gains taxes until the trust sells the property or the beneficiary spouse dies. Assets transferred to trusts are deemed to be disposed of at their fair market price, which can create tax liabilities.
A spousal trust is a good choice when: a spouse lacks financial expertise; requires long-term care; or you wish to ensure that children are beneficiaries of your estate on the death of your spouse.
One important consideration: A spousal trust created on death can be a useful income splitting tool. However, a spousal trust created before death is not a useful income splitting in most cases because of income attribution.
Transfer Assets to Children
Assets transferred to a trust for children can still be subject to tax in the hands of the parent transferor, if that parent can control the ultimate disposition of the assets during their life time. This is why inter vivos trusts are usually created by grandparents, with an adult child as trustee and using an asset that is not subject to attribution.
That way, the adult child can continue to control the assets, a strategy often used as part of an estate freeze – a way of freezing the tax liability on assets. You will have to pay capital gains tax on any increase in the assets’ value to the time of transfer (or freeze), but the remaining taxes on any further increase in value are deferred until the trust sells the assets.
Keep in mind that living trusts have a deemed 21-year life span after which accrued gains in the trust are taxed.
Also, remember that depending on how the property is acquired and the nature of the income earned by the children’s trust, income attribution or “kiddie” taxes may apply if minor children or grandchildren are beneficiaries.
If you are concerned that a child or grandchild won’t be able to handle an inheritance wisely until a certain age, a trustee can professionally manage the money until the beneficiary reaches a specified age.
Care for Children
A trust can ensure that minor children are cared for after your death. If you have children with disabilities, a trust can provide the income for their needs. If you have adult children, setting up a trust to take care of their financial needs can cut taxes. The child is responsible for taxes on trust income that is paid out, possibly at a lower rate.
Trusts have many other uses and can be complicated. So contact your accountant to discuss the ways you can effectively maximize your wealth by creating trusts.
Words of Caution
The CRA has said it launched a special project to audit domestic “inter vivos” trusts to ensure they are set up and managed according to the relevant legislation.
Among the potential targets:
- Promissory note: Has one been issued to the beneficiaries and it is enforceable?
- Trustee withdrawals: If trustees have withdrawn money for personal use the CRA could challenge the deduction taken or asses a taxable benefit to the trustees.
- Twenty-One year rule: The CRA may check to see if the trust has paid the required taxes on accrued capital gains every 21 years..
- Proper records: The agency may check to see if all the proper accounting records have been kept, minutes taken and that the original settlement property can be produced.
Failure to be in compliance with all the necessary trust and income tax rules might result in tax liabilities, penalties and interest. The worst-case scenario would be for the CRA to determine the trust never existed, in which case all benefit and growth would accrue to the original shareholder.