Testamentary Trusts – update

April 8, 2016

As of January 1st, 2016 most of the tax advantages of a testamentary trust have ended.  However there are still a few useful things a testamentary trust can do.

Testamentary trusts can only be created by a direction in a Will.  These types of trusts allowed estate assets to flow into them and allowed the option for income generated by the assets taxed within the trust at a graduated rate.  So beneficiaries at a higher tax rate could withdraw income from the trust which could be taxed at a lower rate.

As of January 1st, income not paid out to beneficiaries is taxed at the higher rate which exceeds 50%.  There are still situations which make testamentary trusts useful as an estate planning tool.  For example, assets left to children can be directed to a trust managed by a trustee named in the Will who can provide guidance for the children until the age when the deceased directed the assets be handed over to the children.  A trust managed by a responsible trustee can also prevent a spendthrift beneficiary from wasting the assets.

So if you have directed your assets be held in a trust for your children, this may still be a good thing.  The graduated tax rates for testamentary trusts can still be used for up to 3 years after death.  However, if there are no tax advantages or risk of mismanagement of the funds, a testamentary trust may create a layer of complexity not needed.  Testamentary trusts do have tax filing requirements.  I recommend you have your Wills reviewed if you do have a trust clause and determine if any changes are recommended.