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