This is our next blog posts in our series dedicated to estate planning. Last week we introduced trusts and dispelled the common myth that they’re just a tax-shelter for the rich. Trusts can be a powerful estate planning when used correctly. There are two main types of trusts: testamentary trusts and living trusts. This week let’s focus on some common uses for living trusts as estate planning tools.
The Family tax cut may be on its way out, but that doesn’t mean you can’t do income splitting. One of the most common ways living trusts are used is for income splitting. Income splitting makes the most sense when one family member earns a lot more than the other. By shifting income onto lower earning family members, income can be taxed at a lower marginal tax rate and personal tax credits can be fully utilized by family members that earn less. The government has cracked down on income splitting in recent years by introducing a “kiddie tax,” but there’s still tax savings to be had by splitting interest income.
Let’s say you’re an entrepreneur and you successfully audition to appear on the next season of Dragon’s Den. You’re confident you’ll score a deal with the dragons. You expect an influx of business from your TV appearance. Let’s say you’re the sole shareholder of your company. After your appearance on Dragon’s Den, you’re sure the share price will rise.
To avoid a heavy tax burden for your estate, you can institute an estate freeze. Without an estate freeze, your shares are deemed to be disposed when you pass away. If the shares have gone up a lot in value, this can be costly for your estate. When you do an estate freeze, beneficial ownership of the common shares of your company is exchanged for preferred shares at a fixed value. New common shares are issued and held in trust for your heirs. Any future gains happen inside the trust, lessening the tax liability for your heirs.
Looking after disabled family members
Let’s say you want to transfer owner of an asset like the family cottage to your adult child. Normally this wouldn’t be a problem, but if your child is disabled, you may still want to retain control over them to ensure they’re properly managed. Through a trust you can transfer ownership of, say, the family cottage, and still look after it. Depending on how the trust is set up and the province where you live, the assets in the trust can actually help your child qualify for income-tested benefits he or she otherwise wouldn’t. A strategy such as the use of the Henson trust is a viable estate and tax planning strategy that ensures that the assets you live for a disabled family member does not disqualify them from some government benefits.
These are just three of the many uses of trusts as estate planning tools. Setting up a trust be can be a little complicated, so it’s best to consult with an estate planning expert to ensure the trust is set up to maximize your tax savings.
Need some help with estate planning? We have a team of experts who can help you navigate the sometimes complex waters of estate planning. Feel free to contact our office today.