Silver and Gold Magazine Winter 2014-2015 | Page 24

Let’s Talk Trusts
– By Ejaz Nadeem, MA, CFP, CLU

Trust is defined as a legal arrangement which allows one
person, called the trustee, to hold property for the benefit
of another person, called the beneficiary. The creator of the
trust is called the benefactor.
Trusts are not used by the wealthy or ultra rich people
only, and there are several reasons why such an arrangement
is required by ordinary people. Most common is that the
beneficiary may be under the age of majority and is not legally
allowed to make decisions about the property ownership and
its utilization.
While preparing Will it is a common practice to appoint
a trustee for underage children of the deceased. Another
reason may be the lack of, or diminished, capacity of person
to make decisions due to a disability or sickness. Estate
planning, income splitting, continuity of ownership of certain
assets such as a cottage, trusts for spendthrifts and trusts for
blended families, are cited among other reasons for using
trust arrangements.
A trust can be created in two ways: During the lifetime of
the benefactor, in which case it is called an inter vivos trust,
or after the death of the benefactor and/or under the terms
of a Will, in which case it is called a testamentary trust.
Trusts and estates are considered individual tax payers
under the Income Tax Act. They are required to pay tax on
any income that is earned by the trust and estate which is
not distributed to the beneficiaries in the year it is earned.
In the past, trusts used to enjoy similar graduated tax rates
as an individual tax payer. This had resulted in significant
tax advantage for a benefactor to create trusts and transfer
property and income at favourable rates to the beneficiaries.
In 1971, Tax Act changes required inter vivos trusts to pay
the highest marginal tax rate applicable to individuals on all
of their income, while Testamentary trusts continued to enjoy
graduated tax rates.
Budget 2014 took steps to eliminate the preferential
treatment of testamentary trusts. As a result, testamentary
trusts and estates are now subject to the highest marginal
tax rate applicable to individuals on all their income. All
testamentary trusts will now have to have a calendar year end

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and such trusts will also be subject to Alternative Minimum
^[