A trust can reduce income taxes

Tax rules are always ridiculously complicated.  Tax rules for trusts are no exception.  Fortunately, there are many tax lawyers and tax accountants who are available to make sure you get the maximum benefits with the fewest hassles.

Briefly, here is an example of how a trust can save your beneficiary income tax after your death.

Jack is the Beneficiary of his mother’s estate.  He earns $70,000 annual income from employment.  His mother leaves him  $500,000 of cash that earns $30,000 annual interest income

If you give the money directly to your beneficiary, after one year your beneficiary’s tax position .. . 

Beneficiary’s tax return

Employment income                      $70,000

Interest income                            + $30,000

Total taxable income                      $100,000

 

 

25% Tax on the $70,000    -$17,500

40% Tax on the $30,000    -$12,000

Total tax owing                            – $29,500 

If you put the money in trust for your beneficiary, after one year your beneficiary’s tax position and the trust’s tax position . . . 

Beneficiary’s tax return

Employment income                      $70,000

25% Tax on the $70,000    -17,500

 

Trust’s tax return

Interest income                                  $30,000

26% Tax on the $30,000                     –   7,800

 

 

Total tax owing                           – 25,300 

 

Savings from using a trust          $4,200

This is a very simple illustration using a rough sampling of various provincial tax rates and personal tax credits.  A trust is not eligible for personal tax credits, but is eligible for its own set of graduated tax rates.  The graduated tax rates produce the savings for the trust.

Expenses of operating a trust

Having a trust does cost some time and money to operate.  Here are some of the expenses that may be incurred with a trust.

Trustee’s fees

  • Regular decisions need to be made about how to invest and maintain the trust property.  The trustee is entitled to be paid for the time and effort spent administering the trust. If the trustee is a family member, then the trustee’s costs may be nothing.  Your trust terms could say how much your trustee is entitled to be paid.
  • If a trust company is the trustee, then the trust company will usually be paid an annual fee based on a percentage of the trust property. The fees for a trust company are usually on a sliding scale (the more valuable the trust property, the smaller the percentage fee) and may start around 2% on the first $1 million in trust property.

Accounting fees for tax filing

  • A trust must file a tax return every year.  Accounting fees can vary widely depending on the number of beneficiaries.  If a trust has only one beneficiary, then the accounting fees should not be more than the accounting fees for a person with similar income.

Legal expenses

  • Your trustee should consult with a lawyer every few years to ensure that the trust is running smoothly and the effect of any new laws is considered.

If the main goal of the trust is to minimize tax, simplify estate administration and minimize probate tax, then it is important to consider the expenses of a trust before proceeding.  If protection of your wealth and the care of your dependents are more important, then the expenses of a trust are merely a cost of achieving your goals.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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