Written by Dana Rittenhouse, TEP, CEA, Estates and Trusts Manager | KRP LLP
The short answer is: IT DEPENDS.
Do you have concerns about your beneficiary’s(ies’) ability to manage money? About their spouse? About their potential creditors? About them re-marrying? If yes, then consider using a testamentary trust created by your Will. The benefits of using a trust include the ability to craft instructions while you are able to do so, which will ensure your assets are distributed as you would choose to do if you were alive, and the peace of mind of knowing how your assets will be controlled after you die. Trusts can ensure income stability for your spouse, while still maintaining control over what happens to the capital in the event your spouse remarries or when your spouse passes away. Trusts can protect your child’s inheritance in the event of a marital break-up or provide your children with an income while ensuring they do not have the ability to spend all of your hard-earned assets with no oversight.
In making your decision, it will be important to know what it will cost and if the benefits of controlling the management of your assets after your death outweighs the costs. Costs include annual trust filings, annual trustee fees (usually a percentage of the assets each year), investment management fees paid to financial advisors or brokers, and legal fees required for any trust resolutions which should accompany all major decisions made by the trustees. These costs need to be considered before you include a trust in your Will.
In addition to costs, consideration will need to be given to income taxes. As soon as a new trust is funded from your Estate, income which is taxed in the trust will be taxed at the highest marginal tax rate applicable to an individual unless the trust meets the Qualified Disability Trust exception. Otherwise the trust may allocate taxable income out of the trust to one or more beneficiaries. This results in the income being taxed in their personal tax returns at the graduated tax rates.
The only exception to paying tax at the highest marginal tax rate is a Qualified Disability Trust (QDT). For a trust to be a QDT, you must clearly identify the trust in your Will and the beneficiary must be eligible for the Disability Tax Credit as approved by Canada Revenue Agency. If the beneficiary qualifies and you have clearly stated in your Will that a trust is to be created, then an election is signed by the beneficiary and the trustee at the time of filing each trust tax return for the trust to be QDT resulting in the income being taxed in the trust at the lower personal tax rates (graduated tax rates). All other trusts will either be required to allocate all income to the beneficiary(ies) or will be taxed at the highest marginal tax rate applicable to an individual which varies depending on the trust’s province of residence. In order to make this allocation, the trust must pay the income to the beneficiaries or the beneficiaries must have an enforceable right to receive the income.
If a beneficiary is disabled but you have not provided for a QDT in your Will, your Estate can fund another trust for the beneficiary called a “Henson Trust”. A “Henson Trust” could provide for your disabled beneficiary while avoiding the loss of eligibility for provincial social benefit programs. This also requires special elections (for a “preferred beneficiary”) at the time of filing each trust tax return, and as the income would be taxable to the beneficiary, it would benefit from the personal income tax rates.
A further item for consideration is whether all of your wishes can be fulfilled using a single trust or if multiple trusts are required. Only one trust at a time can qualify as a QDT for a particular individual.
There are many compelling reasons to include a trust in your will to control the distribution of wealth and even some of the income tax consequences related to your assets. Deciding if a trust is right for you is a personal decision and should be reviewed with your accountant, as well as with your lawyer.