More than half of Canadians (55%) have written a will, but very few have included trusts as part of their estate plans, says a new CIBC poll.
It suggests clients should research the vehicles, as they can potentially save taxes by using them, as well as speed up the transfer of their assets upon death.
Read: Demystifying trusts
In essence, a trust lets investors transfer assets to a beneficiary under certain terms and conditions; they can outline how and when the funds can be spent, says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.
“You can indicate in the trust document that the money should be used to pay for school tuition, for example, rather than to buy a sports car.”
Additionally, he says a trust is considered to be a separate individual for tax purposes. “For a testamentary trust, any income earned on assets is taxed at the same graduated tax rates as an individual. This can yield savings that compound every year.”
Consider this: suppose Mark left assets in a trust earning $100,000 in taxable income each year, and names his wife as the beneficiary. Annual tax on the trust income could be between $14,000 and18,000 lower—depending on province—than if he left the assets directly to his wife, who’s taxable at the top marginal tax bracket.
Even better, your money will be released to your chosen beneficiary sooner. Two new industry reports say certain types of trusts can provide for a quicker transfer of assets after death, since, unlike wills, they’re not subject to the public probate process.
The major benefit? Golombek points out assets inherited directly are often “subject to certain legal claims, such as creditor claims in the event of the bankruptcy or claims by a former spouse in the event of divorce.”
Trusts can also offer income-splitting opportunities, he adds. If you wait until after death to benefit from trusts, you may miss many years of potential tax savings from income splitting.
“If you’re in a high tax bracket, you could loan assets to a family trust for the benefit of your children who are in lower tax brackets. Income paid to the children, or payable on their behalf for expenses such as for private education or summer camps, may be taxed in the children’s hands at their lower tax rates.”
The tax benefits of trusts are also applicable to your immigrant clients, with immigration trusts letting new Canadians avoid paying tax on assets held in foreign trusts.
“If you recently moved to Canada and transferred assets to a foreign trust, income on the assets may not be subject to Canadian tax during your first 60 months of residence in Canada,” says Golombek.
“However, it’s most beneficial to place assets into the trust before immigrating since the 60-month tax-free period begins at the time you establish Canadian residence. The funds won’t be taxed during the 60-month exemption period, so immigration trusts can result in tax savings up to 50% of the trust income.”
And remember: the single largest mistake in estate planning is failing to implement plans early enough.
“People assume it’s most beneficial to transfer assets into a trust upon death. But, it doesn’t always make sense to wait until the end of life to transfer all of your assets. It can be a big mistake to overlook the benefits certain trusts can offer when assets are transferred during your lifetime, says Golombek.