La Cible

Mai 2018

La Cible, magazine officiel de l’IQPF, est destinée aux planificateurs financiers et leur permet d’obtenir des unités de formation continue (UFC). Chaque numéro aborde une étude de cas touchant les différents domaines de la planification financière.

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23 Tax benefit of an education trust FEATURE ARTICLE The first column shows the situation with no testamentary trust. The income taxes payable in 2018 1 on the total income (personal income and investment income on inheritance) is $19,443. The next three columns show the results of creating a trust. The trust pays $11,000 to each child 2 and $2,000 is left in the trust to pay the management fees. The children have no other income. In our example, a tax savings of nearly $7,000 is generated each year. More capital and more children would push the benefit up to over $10,000 per year. The list of allowable expenses is very broad, but it is not recommended to have the trust pay for primary needs (food, lodging, clothing). When the children approach the age of majority and start generating their own income (summer job, RESP payments), the strategy loses its appeal. The new tax rules for testamentary trusts do not prevent the use of education trusts, but care is required concerning the amount of capital invested. If the income generated in the trust cannot be spent entirely for the children, the only option is to attribute the remaining income to the spouse to avoid taxation at the maximum marginal rate in the hands of the trust. But if the trust fees are based on the assets in it, they must be paid on capital that does not generate a tax benefit. In short, the 2016 changes in the income tax rate of testamentary trusts do not prevent them from being used, but it is important to make sure that no income will be taxed to the trust and that the amount of the capital does not lead to any additional fees. 1 Considering only the basic personal tax credit. 2 Actually, the expenses are often paid directly by the trust. Amount bequeathed to the trust: $600,000 Rate of return: 4% Year: 2018 Spouse without trust Spouse with trust Testamentary trust Child beneficiaries Income before bequest $50,000 $50,000 Income generated by bequest Direct $24,000 $ — In the trust $2,000 Expenses per child $11,000 Trust fee ($2,000) $ — Taxable income $74,000 $50,000 $ — $11,000 Income taxes per child $ — Number of children 2 Total income taxes $19,443 $10,535 $ — $ — Income taxes Fee Annual savings $19,443 ($10,535) ($2,000) $6,908

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