So your children are all grown up. They’ve moved away, attended university and have an established career. If your children’s annual income is more than $125,000 a year, consider leaving them their inheritance through a trust established in your will.
Canada’s personal income tax rates are progressive. This means that as your income increases, you will pay higher rates of income tax on each additional dollar you earn. A trust that is included in your Will and established upon your death can also take advantage of these progressive rates and are an excellent opportunity to split income.
The Incremental Inheritance
The table below shows how the income earned on a inheritance $500,000 is taxed based on whether it was received directly or in a trust. Assuming the beneficiary is a resident of Ontario and has a marginal tax rate of 46.4% on regular income.
| Type | Direct | Through A Trust |
|---|---|---|
| Interetance Received | $500,000 | $500,000 |
| Interest Income Earned (5%) | 25,000 | 25,000 |
| Beneficaries Tax Marginal Tax Rate (46.4%) | (11,600) | - |
| Trust's Tax Rate (21.05%) | - | (5,263) |
| After Tax Income | $13,400 | $19,738 |
You can see that the benefits can be substantial flowing the income through a testamentary trust.
A Variation
If you want to leave an estate but are concerned you will not have enough at death, a variation of this strategy creates the trust in your Will and funds it from a life insurance policy.
Do You Have Questions?
Do you have question about this strategy? Consider leaving a comment or question in the comment box.
{ 4 comments… read them below or add one }
I received an inheritance from my brothers estate. What are the income tax implications of me giving half of the dollar value to my wife?
Reg
Any investment income earned by your wife would be taxable in your hands. If you invest it in an account in your name and do not add it or commingle the inheritance, then it will be protected from division if there is a divorce.
Would atribution rules apply to me or would they apply to my brother?
They would apply to you.