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Big changes in estates — are you ready?

If you have a will or are a beneficiary of a will, you may be concerned about changes announced in the 2014 federal budget to limit some of the tax savings realized by certain estates.
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Laurie Bissonette, FCPA, FCA, is a partner with KPMG Enterprise. She can be reached at 705-669-2521 or lbissonette@kpmg.ca

If you have a will or are a beneficiary of a will, you may be concerned about changes announced in the 2014 federal budget to limit some of the tax savings realized by certain estates. These new rules will affect your estate planning, including any existing and future trusts. Since these changes are effective Jan. 1, 2016, you have less than a year to revisit your will and estate planning to make any needed adjustments and minimize the impact of these changes.

These changes, which are now law, will tax certain trusts at the top marginal tax rate rather than the lower graduated tax rates that some trusts currently pay. In addition, the government has changed the way accrued gains will be taxed for spousal and certain other types of trusts and the way donation credits are claimed when donations are designated in an individual’s will.

Does your will create a testamentary trust to benefit your spouse, common-law partner or children?

Under the new rules, effective Jan. 1, 2016, all existing or subsequently created testamentary trusts will be subject to tax at the top federal tax rate, subject to two exceptions. The current tax savings available to a trust from graduated rate taxation is in the range of up to $15,000 or more per year, depending on the province the trust resides in. One exception is that graduated tax rates will apply to the first 36 months after the death of an individual for that individual’s estate, provided a designation is made for that estate in the first taxation year that ends after 2015.

Some trusts and estates will have two tax returns due in 2015. This is because the new rules provide that existing testamentary trusts and estates that have existed for longer than 36 months and that have off-calendar year-ends will have a deemed year-end as of Dec. 31, 2015.

The extensive legislative changes will also affect other areas besides the applicable tax rates and taxation year. These changes may affect the ability of the estate of a deceased owner of a private company to undertake common tax planning to eliminate possible double taxation that can arise.

Have you established a spousal trust?

The proposed changes will also affect existing and new spousal trusts. Essentially, the deceased taxpayer’s will creates a spousal trust that places all assets in trust for the benefit of a spouse during the spouse’s lifetime. On the death of the spouse, the assets are distributed in accordance with the deceased’s direction, not the spouse’s direction.

Under existing estate rules, the spousal trust is deemed to realize any gains in value related to the trust’s assets on the death of the spouse, and is taxed on those gains at the graduated tax rates. Under the proposed rules, these graduated tax rates will no longer apply, and the gains will be taxed in the hands of the spouse (not the spousal trust). This can cause significant problems if the beneficiaries of the spouse’s estate are not the same as the beneficiaries of the spousal trust. Finance is aware of this issue but it remains to be seen if they will attempt to fix it.

Does your will or estate make provisions for gifts to charity?

The new rules allow greater flexibility in using the donation tax credit related to donations made by will and gifts by direct designation, as of Jan. 1, 2016. The new rules allow a donation to be allocated between the deceased and their estate where the donation is made by a graduated rate estate. In this case, the deceased may use the donation credit in the year of death or in the immediately preceding year. Alternatively, the graduated rate estate can use the donation in the year of the donation, carry it back to any of its prior taxation years, or carry it forward for up to five years.

Action required

Given all the significant changes in the taxation of estates and trusts, it may be a good idea to sit down with your accountant and lawyer in the coming year to determine whether you or any estate that you’re involved in is affected.




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