Up until January 1, 2016 trusts created in your will, called testamentary trusts, had a distinct advantage as earnings in the trust were taxed at graduated rates. A graduated tax rate is how an individual’s income is taxed – lower rates at lower income levels with tax rates increasing as the level of income reaches higher thresholds. This advantage was so attractive, wills often contained instructions to create multiple testamentary trusts to reduce the tax load on their beneficiaries.
For example: A Saskatchewan taxpayer paid a combined federal and provincial tax rate of 8.9% on taxable income of 20,000 in 2015. However, if the taxable income increased to 50,000, the combined rate was 20.1%.
Starting January 2016, testamentary trusts are taxed at a flat top rate of taxation. A Saskatchewan taxpayer will pay a combined federal and provincial tax rate of approximately 44% on taxable income of 20,000. This is a significant increase in taxation of over 400% for a testamentary trust.
There are still good reasons to use testamentary trusts in your estate planning but reducing the tax paid by a trust is no longer one of them. The two exceptions are: Graduated Rate Estates (GRE) and Qualified Disability Trusts (QDT). For purposes of this article I will focus on the GRE.
Graduated Rate Estates
The Graduated Rate Estate will be the trust most commonly used. It is similar to testamentary trusts prior to 2016 with two important limitations:
- There can only be one GRE per estate.
- A GRE can exist for only 36 months after the date of death.
There are many rules and features which apply to GRE trusts which are not covered in this article. You do not need to redo your will to utilize the GRE but if your will includes instructions regarding charitable donations or if your estate includes shares of a private company, your executor may have to use a GRE. Now is a good time to make sure you have named the right person to be your executor. If you are in doubt or have questions, please see a lawyer for a review of your will.
This information on the new regulations regarding Graduated Rate Estates (GRE) is brought to you courtesy of Regina based financial planner Grant Karst, CFP, CLU, CHFC, BlueSky Financial.