Stewart McKelvey

PUTTING TRUST IN YOUR ESTATE PLANNING A By Paul Coxworthy and Michael McGonnell trust involves the division of legal and beneficial ownership of property. The trustee has legal title to the prop- erty. He holds this property in trust, as a fiduciary, for the beneficiaries of the trust. As the name implies, a beneficiary is a party who enjoys the benefits of the trust property. Trusts serve four particularly useful functions with respect to estate planning: 1. Income splitting 2. Providing for a spouse while preserving the estate 3. Providing for minors 4. Passing assets outside the estate Income splitting Although trusts do not exist as separate entities such as corporations, they are taxed as if they have an independent existence. Trusts that are estab- lished by a living person. An inter vivos (among the living) trust, are taxed at the highest marginal 2 WINTER 2012 DOING BUSINESS IN ATLANTIC CANADA rate. This means that no matter how much money the trust earns in a year, the trust will be taxed on this income at the highest marginal tax rate. If the trust pays this income to a beneficiary of the trust, subject to the attribution rule, the income usually will be taxed in the hands of the beneficiary at the beneficiary's particular tax rate instead of taxed in the trust. A testamentary trust is one that arises as a con- sequence of a person's death and is established in a person's will. A special feature available to tes- tamentary trusts is like people, they are subject to graduated tax rates. This means that a benefici- ary of a testamentary trust can have the advantage of multiple graduated rates. Suppose a benefici- ary earns $50,000 per year personally and is the beneficiary of a trust that also has $50,000 of in- come. His personal income is taxed at a gradually stepped-up rates tax. If the trust is an inter vivos trust, the income of the trust will be taxed at the highest marginal rate unless it is paid out to the

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