Timing key to maintaining advantages of GRE designation



Although changes that took effect in 2016 mean that testamentary trusts are now generally subject to tax at the highest marginal rate, a notable exception is now in play — the Graduated Rate Estate (GRE), Toronto litigator Matthew Urback writes in The Lawyer’s Daily.

As Urback, an associate with Shibley Righton LLP, explains: “A GRE is a special designation that a qualifying estate may adopt. In particular, a GRE is an estate that comes about as a result of an individual’s death, on or after Dec. 31, 2015, and no more than 36 months after the death. The estate at that time must be a testamentary trust. (A series of conditions must also be satisfied in order to qualify.)”

A major benefit of a GRE, says Urback, is that it continues to enjoy graduated tax rates on income earned during this 36-month period. It also strongly incentivizes and rewards charitable giving in a will, he adds.

“Perhaps most notably, charitable donations made on death, or after death, are no longer deemed to have been made by the deceased personally. Instead, the gift is now deemed to be made by the estate,” writes Urback.

As a result of this change, he says, the estate now has a great deal of flexibility in determining when to claim the corresponding tax credit. For example, says Urback, the credit could be used either by the estate, the deceased, or both — whichever is more beneficial.

While in the best of scenarios, there should not be an issue with ensuring that the donation is made within this 36-month period, Urback says if the administration of the estate is delayed for any reason, the value of this benefit could be lost.

“The Department of Finance was mindful of these potential delays, so shortly after enactment, the rules were changed to allow for a gift now made within 60 months of the date of death to qualify as a gift made by the GRE. This change means that even though an estate would cease existing as a GRE by the end of the 36-month period, it still has another 24 months to make the gift in order to qualify and receive the accompanying tax credit,” he writes.

Ultimately, says Urback, the power and flexibility of this tax credit can be used as a crucial planning tool, but failure to take advantage of these benefits or adhere to the timeline diminishes its rewards, and income generated will then be subject to tax at the highest marginal rate.

“Keeping the timing, and the ultimate deadline, in mind is absolutely critical for estate trustees in order to maintain the advantages that come with the GRE designation,” he says.


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