January is a good a month as any of the other 11 months to sit back and put your affairs in order. It is a great time to pull your will out of the safe and review it. For a majority of people it is time to create and prepare a Will or Wills if you own a corporation or assets in multiple jurisdictions.
It is essential that you have a will that is fairly current!!
Any changes in the relationships you have with your beneficiaries need to be reflected in your Will and, in some cases, may even automatically cancel your current Will. For example, marriage causes a Will to be revoked unless the Will was written in contemplation of marriage. On the other hand, divorce does not cancel a Will; it only nullifies those sections pertaining to the former spouse. If you and your spouse are separated, you will need to make the necessary updates to your Will.
In Ontario, probate fees are the most expensive in Canada. The tax is calculated as $5 per $1000 of the first $50,000 of the estate and $15 per 1000 for the value of an estate over $50,000. It works out to approximately 1½ percent; for an estate of a value of one million dollars, the probate fees would be $14,500 using that formula. I can assure those that have assets in excess of a million dollars that in the vast majority of the cases (98%) a carefully prepared Will by a competent lawyer will cost significantly less than $14,500!!
Spousal Trusts creates a second taxable entity, the Estate, that has an income that is taxed at the graduated tax rates. The spouse then has their own income which is taxed at graduated rates together with the benefit of the income from the Spousal Trust which is also taxed at graduated rates. The annual dividends that can be realized by creating a Spouse trust can be in excess of $60,000 per year without triggering any taxes.
In addition to this tax savings, Spousal Trusts are often used to give the deceased spouse some additional control over the assets they have left in their Estate. Many people like the idea that the property is somewhat protected from the remarriage of the surviving spouse. If assets are left outright to the surviving spouse, they can remarry thereby revoking their existing Will, or make a new Will which leaves a new spouse as primary beneficiary to the exclusion of the children.
A Spousal Trust can be used to hold non-registered investments or real estate such as the family home. In either case, there is no triggering of income taxes on the death of the first spouse when the property passes into the Trust and it provides that the spouse is entitled to receive all of the income from the Trust and no person other than the spouse can receive capital during the spouse’s lifetime. In addition, the principal residence exemption should still be available for the home.
Testamentary Trusts for Other Beneficiaries
A testamentary trust, also known as a will trust, is created only after your death, based on specific instructions contained in your Will.
Testamentary Trusts for non-spouses are useful in a variety of circumstances. Without a Testamentary Trust, when an individual attains the age of 18, that person will receive his or her bequest from a Will. This may not be desirable when significant assets are involved. Testamentary Trusts can be used to control when assets are distributed to beneficiaries. A “special” Testamentary Trust may also be useful in certain circumstances when a beneficiary receives government assistance. A Testamentary Trust in this instance can be used to ensure that income earned on assets do not reduce the government assistance received.
Testamentary Trusts also provide opportunities to save tax. Beneficiaries with Testamentary Trusts can save significant taxes on the income earned on the assets intended for them. Since Testamentary Trusts are taxable entities that are taxed at graduated rates, significant tax savings are possible if income is taxed in the Trusts rather than in the hands of beneficiaries. Testamentary Trusts can also be used to income split with a beneficiary’s family to significantly reduce the family’s tax burden. If your beneficiaries are U.S. citizens or live permanently in the U.S., planning that utilizes Testamentary Trusts can be used to save U.S. Estate tax when they die.
A Will is a necessary tool in all estate plans and should not be overlooked. We at DiBrina Sure Group do not prepare Wills but would be more than happy to assist and refer you to lawyers who can prepare them for you.
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