Tax and Testamentary Trust

2009-01-06T08:36:00.001-08:00

Estate planning is the process of accumulating and disposing wealth before death of an individual or estate owner. The most important goal of estate planning is to make sure that the greatest amount of the estate is passed to the estate owner's intended beneficiaries while paying the least amount of taxes. Testamentary trust is one of the estate planning vehicles if period of income is required to distribute to beneficiaries for whatever reason.

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I.Definition
Unlike living trust, a testamentary trust is a will in which it indicates that certain assets will be held in trust for the deceased person. It creates a legal relationship between the testator of the trust, the trustee, and the beneficiaries of the trust. The main purpose of a testamentary trust is to provide income or capital, or both to the beneficiaries. Since the trustee is the owner of the trust, he/she has the duty to allocate the income and capital payment to the beneficiaries according to the will.

II. Tax and testamentary trust
a) Testamentary trust established initially from original testator estate, after all taxes have been paid during probate.
b) Testamentary trust under income tax law is treated like other tax payer's with its own identity. Even though the calender year may be vary, it has to report all its income including interest income, capital gain, and dividends to the tax department. Income distributed to the beneficiaries are deducted from the trust incomes. Any income retaining in the trust will be taxed according to the graduated rates in the Income Tax Act
c) Assets in the testamentary trust must complied with The "21 year deemed disposition rule" in the Income Tax Act, that means all assets in the trust must be disposed of after 21 years since first establishment.
d) "Attribution rules" in the Income Tax Act is not applied to the testamentary trust.

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Estate Planning 14

Tax and Testamentary Trust