1) A tax-planned will that creates a testamentary trust can help reduce taxes for surviving spouses and children compared to leaving assets directly to beneficiaries. 2) By establishing a testamentary trust, assets can be income split between the trust and beneficiaries, taking advantage of each of their individual tax brackets and credits to lower their overall tax burden. 3) Common candidates for a tax-planned will include those with wealth in non-registered assets like real estate, stocks, bonds and private corporations, as well as life insurance proceeds. Planning is especially beneficial for high income or high net worth individuals.

1. The tax-planned will
Comprehensive
Creating tax savings for your spouse and the next generation
Estate Solutions
First a little background
Example of tax savings
ED MADRO B.A. Econ., CPCA
Consultant
Lawyers and notaries often recom- made separate from the settlor’s will Their combined after-tax income is
mend the creation of trusts within for the purpose of receiving proceeds $99,345, calculated as follows:
wills for reasons that do not relate payable under life insurance policies.
to tax. Common scenarios include The distinction between inter vivos Investment income
the management of property for trusts and testamentary trusts is (George) $50,000
young beneficiaries or the disabled, important for reasons of taxation. Pension income
or for a spouse where there is a While the undistributed annual (Ellen) $50,000
desire to preserve the capital for the income of an inter vivos trust is taxed CPP/QPP
next generation. While these are all at the top personal rate (top personal ($11,520 each) $23,040
valid reasons for the creation of trusts, tax rates range from a low of 39% in
the tax-savings opportunities of testa- Alberta to a high of 50% in Nova OAS
mentary trusts are often overlooked. Scotia)*, testamentary trusts benefit ($6,222 each) $12,444
from the same graduated rates of tax Total income $135,484
as individuals. The ability to create Combined tax
A trust is a legal relationship under a separate taxpayer in the form of a (Federal & Ontario)* (30,169)
which a person, referred to in trust trust, with access to its own graduated
jargon as the “settlor”, gives up Combined
rates, is a significant tax-planning
ownership of property and transfers after-tax income $105,315
opportunity.
control over the property to a trustee,
or group of trustees, who manage Now let’s assume that Ellen is a
the property for the benefit of other Let’s first examine how a testamentary widow and, like most married
persons, called the “beneficiaries”. trust can save tax for a surviving spouse: Canadians, George had left his
When a trust is referred to as a testa- entire estate directly to his surviving
George is a retired businessman
mentary trust, it means control over spouse. In these circumstances
who earns an annual income of
the property was transferred to the Ellen’s after-tax income would be
$50,000 from his non-registered
trustees as a consequence of the $78,512, calculated as follows:
investments. His spouse, Ellen, is a
death of the settlor. This is in contrast
retired teacher who earns approxi-
to an inter vivos trust, where the Investment income $50,000
mately the same amount as George
transfer of property is made during Pension income $50,000
each year from her pensions and
the lifetime of the settlor. The terms
Registered Retirement Income CPP/QPP $11,520
of a testamentary trust are most
Fund (RRIF). Both Ellen and OAS $6,222
commonly documented within the
George are over the age of 65 and
will of the settlor. However, outside Total income $117,742
qualify for Old Age Security (OAS)
of Quebec, a testamentary trust can Combined tax &
and Canada Pension Plan
also be created under the terms of repayment of OAS* (39,230)
(CPP)/Quebec Pension Plan (QPP).
an insurance beneficiary declaration
After-tax income $78,512
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2. Comprehensive Estate Solutions
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What could George
In comparison to their combined So how would such an arrangement trust can give a high tax bracket
have done differently?
after-tax income while George was benefit Ellen? As a trust created beneficiary the ability to generate
still living, Ellen’s after-tax income under George’s will would be a testa- a higher level of after-tax income.
has dropped by $26,803. While the mentary trust, an opportunity exists Separate trusts can be created under
loss of George's OAS and CPP make to income split. Ellen would receive a parent’s will for each child and his
up a large portion of the difference, all of the trust’s income to use as or her respective family. Discretion is
Ellen's tax bill is $9,061 higher than she sees fit, but an Income Tax Act usually given to the trustees over the
What about the
the combined family tax bill when election can be made allowing the distribution of income among family
next generation? Who should consider
George was still living. With Ellen trust to retain responsibility for members. Annual income can be
the tax-planned will?
now reporting all the investment reporting the income. Let’s return to distributed to the high-tax bracket
income that was reported by George, our example to highlight the benefit beneficiary for his or her own use,
she has been pushed into a higher of such an income-splitting strategy. but the income can be taxed at lower
tax bracket and is now subject to rates within the trust. Alternatively,
OAS clawaback. Investment income when income can be used to benefit
(Reported by trust) $50,000 a person with little or no income of
In Canada, Old Age Security is
Pension Income their own (such as a beneficiary of
reduced at the rate of 15% for
(reported by Ellen) $50,000 school age or university age) it may
every dollar of income in excess
CPP/QPP $11,520 be preferable to have the income
of $67,700*, resulting in a total
reported in the hands of the benefici-
repayment of Old Age Security OAS ary. This will allow for the utilization
when income levels reach approxi- (reported by Ellen) $6,222 of the beneficiary’s basic personal
mately $109,700. When Old Age Total income $117,742 tax credit, which shelters the first
Security is taken into account, seniors
Total tax* (25,781) $10,527 of income from federal tax*.
with income in excess of $67,700 are
subject to the highest rates of taxation After-tax income $94,987 The tax efficiency of a trust can be
in Canada. In this example, Ellen further enhanced if the trust’s invest-
pays tax on her income between ments produce “eligible” dividend
For Ellen, the tax savings would
$83,089 and $109,700 at an effective income earned from Canadian
amount to $13,449 annually. Even
marginal rate in excess of 51.9%. corporations. Where trust income
after paying some additional fees for
is used to assist a beneficiary with
the preparation of a trust tax return,
no other income, such a beneficiary
many would view the tax savings as
can receive up to $50,530 in dividend
significant. If the assets from
Let’s assume that, instead of leaving income before having to pay federal
George’s estate produced a higher
his estate directly to Ellen, George income tax (although in a few
level of income, the savings would
created a trust for Ellen under his provinces some provincial tax will
be greater.
will. The trust would provide Ellen be payable beginning at lower
with a right to all income generated income levels).
by the trust’s investments and the
trustees would have the power to
High tax bracket children can also
access the trust’s capital for Ellen’s
benefit from this income-splitting
benefit. Ellen could even be one of Anyone who has accumulated wealth
strategy. Receiving their inheritance
the trustees involved in the trust’s in the form of non-registered assets
indirectly through a testamentary
management. should consider this strategy. Such
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3. Estate Solutions Comprehensive
First steps
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assets could include, but would not beneficiary is a surviving spouse, the
be limited to, real estate, stocks, major limitation relates to Registered In consultation with your accountant,
bonds, mutual funds and shares in Retirement Savings Plans (RRSPs), we'll determine whether this strategy
private corporations. Also take into Registered Retirement Income Funds makes sense for you and estimate the
consideration the proceeds of any life (RRIFs) and other forms of registered potential tax savings that can be
insurance policies that will be payable accounts. With these types of achieved. Let's talk soon to determine
on death. Very often retired business accounts, significant tax deferral will how a tax-planned will can assist your
owners and farmers are good candi- be lost if, on your death, the accounts family.
dates, but by no means is the strategy are not transferred to your spouse in
restricted by occupational back- their registered form. In the event
ground. From a tax standpoint, the you have no surviving spouse, direct-
decision to utilize a testamentary ing registered accounts through your
trust turns as much on the income will to a testamentary trust can still
that can be generated from the trust’s be good tax planning.
assets, as it does on the underlying
value of the assets. If the potential
ED MADRO B.A. Econ., CPCA
Consultant
edward.madro@investorsgroup.com
(403) 220-9654
*Tax rates, exemptions and benefits are as of January 1, 2011 and assume residency in Ontario.
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“The tax-planned will – Creating tax savings for your spouse and the next generation” ©Investors Group Inc. 2012. MP1065 (04/2012)
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