TORONTO, Sept. 19, 2012 /CNW/ - While a recent CIBC poll found 55 per
cent of Canadians have a will in place, few have included trusts as
part of their estate plan - vehicles that could potentially save them
tens of thousands in taxes and speed up the transfer of assets.
Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private
Wealth Management notes that a trust is essentially a vehicle that
allows a person to give assets to someone else (known as a
"beneficiary"), but under certain terms and conditions, such as when
funds can be spent and on what. The added benefit of a trust is that,
for tax purposes, it is treated as a separate individual which may
reduce taxes paid.
"Trusts are a valuable part of an estate plan to direct your money to
the person intended, when intended, and for the purpose intended," he
says. "For example, you can indicate in the trust document that the
money in trust should be used to pay for school tuition and not to buy
a sports car."
Two new reports on the benefits of including trusts in estate plans
provide a number of reasons why people should consider trusts as part
of an overall financial plan. Among those reasons are:
Pay less tax - a trust can save an individual up to $18,000 in tax annually compared
to the individual personally owning the property held in a trust.
Decide how inheritance is spent - a trust can set out that an inheritance is to be spent wisely, such
as for university tuition and not on something else.
Help loved ones get their money sooner - certain types of trusts can provide for a quicker transfer of assets
on death since, unlike wills, trusts are not subject to the public
"While the rules for trusts can be complex, they can save you thousands
of dollars every year while you are alive and ease the tax burden on
your estate after your death. The single largest mistake in estate
planning is failing to implement plans early enough," says Mr.
Golombek. "Even among those who have included trusts in their estate
plans, people assume it is most beneficial to transfer assets into a
trust upon death. But in fact, 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 individual's lifetime."
Mr. Golombek says incorporating trusts into an estate plan offers
several key benefits:
Help your heirs pay less tax
Mr. Golombek explains that, "A trust is considered to be a separate
individual for tax purposes. For a testamentary trust, which is a trust
created as a consequence of death, any income earned on trust assets is
taxed at the same graduated tax rates as an individual. This can yield
tax savings that compound year after year." For example, suppose Mark
were to leave assets earning $100,000 in taxable income each year in a
trust naming his wife as beneficiary. Annual tax on the trust income
could be between $14,000 to $18,000 lower (depending on the province)
than if Mark left the assets directly to his wife and she were taxable
at the top marginal tax bracket.
Control distribution of inheritance over time
Would you prefer your child use their inheritance to fund post-secondary
education or buy a sports car? Mr. Golombek states, "Rather than having
your inheritance distributed in one lump sum, you can specify in the
trust document when distributions can be made to your child and for
what purposes, such as post-secondary education or living expenses."
Reduce probate fees and transfer assets more quickly
Some types of trusts can provide a quicker and private transfer of your
assets to your heirs since the assets are no longer subject to the
time-consuming public probate process.
Protect inheritances from legal claims
"A trust can sometimes help protect inheritances from legal claims,"
says Mr. Golombek. If an individual inherits assets directly, the
assets may be 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. Leaving assets in trust for your beneficiaries can
sometimes protect the beneficiaries' inherited assets from these
Benefit from income splitting
If you wait until after death to benefit from trusts, you may miss many
years of potential tax savings from income-splitting during your
lifetime. Mr. Golombek states, "If you are in a high tax bracket, you
could loan assets to a family trust for the benefit of your children
(or grandchildren) 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." This may mean annual family tax savings up to
approximately $18,000 (depending upon the province where you reside)
every year for each trust beneficiary. Since attribution rules may
result in trust income being taxed in your own hands, a tax advisor
should be consulted.
Take advantage of immigration trusts
"An immigration trust may allow new Canadian immigrants to avoid paying
tax on assets held in a foreign trust," Mr. Golombek points out. For
example, 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. However, it is most
beneficial to place assets into the trust before immigrating or as soon
as possible afterwards since the 60-month tax-free period begins at the
time you establish Canadian residence. Since the trust income will not
be taxed during the 60-month exemption period, immigration trusts can
result in tax savings up to 50% of the trust income.
Maximize inheritance of foreign assets
An "inheritance" trust is beneficial if a foreign family member wishes
to leave a gift or inheritance to a Canadian resident. Mr. Golombek
uses an example to make his point, "Suppose you live in Canada and
expect to receive substantial funds from a parent who has always
resided outside Canada. If your parent transfers the assets into a
foreign trust, no Canadian tax will be levied on the trust assets'
future income or gains. The transfer must be made directly from your
parent to the trust; if you receive the funds first and then transfer
them into an inheritance trust, the tax-free benefits will not apply."
Due to the complexity of trusts, Mr. Golombek recommends individuals
obtain advice for their specific situation from a competent expert in
the trust and estate planning field. More details and the benefits of
trusts are outlined in CIBC Private Wealth Management's latest reports,
Planning from the Grave: Testamentary Trusts and In Trusts We Trust: Tax and Estate Planning Using Inter Vivos Trusts which are part of a five-part series of reports on estate planning.
CIBC Private Wealth Management meets the unique needs of high net worth
clients through a full range of integrated advisory capabilities and
solutions, including exclusive private banking services, customized
financial planning and investment advice, trust and estate solutions.
CIBC Trust can act as Corporate Trustee for Trusts that are part of
your estate plan.
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For further information:
Sean Hamilton, Director, External Communications, 416-304-8456, Sean.Hamilton@cibc.com