Income splitting and avoiding probate on death are possibly two to the most popular financial planning strategies in Canada. However, did you know that when you are planning your estate, that it is possible to avoid probate and provide your heirs a flexible income splitting opportunity using trusts?
What Is A Trust?
A trust is a structure that is established to separate the legal and beneficial ownership of assets although this is not required (as we shall see shortly). For more information, please see my articles entitled What Is A Trust? and Types of Trusts.
Trusts & Income Tax
When a person establishes a trust and places assets in that trust during their lifetime, any income retained in the trusts will be taxed at the highest marginal tax rate. The top rate in Canada ranges from 39% to 48% depending on your province of residence.
When a trust is established and the assets settled in the trust as the result of death, then any income retained in the trust is taxed using the same graduated tax rates of an individual. While the personal tax credits are not available, there is an opportunity to split income from an inheritance with a trust established by a deceased person’s will.
Probate & Income Taxes
Probate is a court fee imposed to confirm the executor of an estate and the validity of the will. Any assets that are specifically mentioned in the will will be subject to the calculation of the probate fee. Certain assets that allow you to name a beneficiary (i.e. insurance, segregated funds, other insurance contracts, RRSPs, and RRIFs) are said to pass outside the estate and are not included in the calculation of probate fees.
For more on probate, see my article entitled How to Minimize Probate Fees.
The Strategy
This strategy works best with life insurance polices or segregated fund policies since these products allow trust settlement options in their terms.
You must take note of your insurance policy assets and consider purchasing segregated funds if they suit your investment and other needs. Each of the insurance contracts must have insurance trusts as the named beneficiary.
You must then establish the terms of the insurance trusts in you will. To provide maximum flexibility, allow the intended beneficiary to be the trustee. The terms should specify entitlement to the income of the trust and provide access to capital for any reason.
What Happens At Death?
When you pass away, your will establishes a trust. The insurance contracts will pay directly to the trust and by-pass probate.
The assets in the insurance trusts are then invested and the income is taxed inside the trust as opposed to in the beneficiaries hands. Income is paid out of the trust on an after tax-basis and viola, probate is avoided and income is split!
Related Articles
- Types of Trusts
- Pitfalls Of Transferring Ownership To Avoid Probate
- Taxation of Income Trusts
- Probate Tip – Multiple Wills
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{ 2 comments… read them below or add one }
I would like to ask a question…
Do you know of a service that can produce T2200, gst370 and Tp64.3(quebec) forms….all related with the T2200 employee expense form on an automated basis(not one at a time).
This is a very time consuming process for my company!!!
Thanks in advance for any thought on this.
PS.. Is it legal with SOX guidelines and CDN bill 118(i think) for an individual employee to fill this kind of form then submitted to the company for final approval and signiture ??
Thanks in advance.
To produce? Unfortunately no.