As was mentioned in last week’s Tax Tip, new legislation that will significantly affect estate planning recently became law, effective January 1, 2016. Some of the changes were discussed in last week’s Tax Tip and another recent Tax Tip regarding estate donations.
This new legislation will also eliminate graduated rate taxation for most testamentary trusts and dramatically changes how certain “life interest” trusts (like spousal trusts, alter ego trusts and joint partner trusts) will be taxed on death, as of January 1, 2016.
The rules affecting the elimination of graduated rate taxation for testamentary trusts and estates are significant and complex but, essentially, restrict access to graduated rates (for a maximum of 36 months) to only certain estates, not trusts. While the Department of Finance may have had some fair concerns regarding some aspects of the current rules, many practitioners feel the new rules go too far. The rules ignore certain realities. For example some estates require more than 36 months to administer but the new rules do not extend the availability of graduated rates in these cases. In addition, some estates are divided into multiple pieces but the 36 month access to graduated rates and some other items is only provided to one estate. The list of further implications of the new rules on estate and testamentary trust planning is lengthy and beyond the scope of a Tax Tip.
Think your current estate plan is safe because you’ve already implemented? Think again! The new rules will apply to all estate plans, even those already developed under the current rules. For example, the new rules will apply to an existing testamentary spousal trust. Effective January 1, 2016 such a trust will have to change to adopt a calendar year end and will lose access to the graduated rates it currently receives. The lack of relief from the new rules for pre-existing testamentary trusts will render prior estate planning less effective with no way to adjust since the person who created the plan is deceased.
So what does all of this mean for Canadians’ estate planning? Well, at a minimum, it means that any estate plans (implemented or contemplated) that include testamentary trusts, alter ego, joint partner trusts or gifts by will need to be reviewed to determine tax and practical efficiency on a go forward basis.
Make yourself a New Year’s resolution to contact your tax advisor and review your estate plan. The changes contained in the newly enacted legislation are monumental.