Settlor died March 2024. Deemed year end of trust and income to death allocated to settlor. Income in new year can be allocated to residual beneficiaries? One source implies taxed in trust at high rate.
What’s your question?
If you’re unsure about the taxation of trusts, seek out other advice. It is a specialized area and your post/comment suggests making it worthwhile to do so.
I have a similar question. If the settlor of an Alter Ego trust dies on March 15, 2025, there is a deemed disposition of her assets also on March 15, 2025. Can the capital gains be allocated to her Terminal return?
She and te trust are distinct entities. If she realizes he aims on deemed disposition, they go on her return. The trust has a year end and gains in the trust are taxed there or allocated, likely to her.
The trust continues with future incom/gains taxed to the residual beneficiaries or in the trust.
Thank you. One person told me the income and gains have to be declared in the trust and not allocated to the settlor/beneficiary or her remainder beneficiaries
As noted by @neal If they are HER assets, they go on her HER terminal T1. If they are the TRUST’s assets, they need to be dealt with in the TRUST. According to Claude, it’s possible to set up an alter ego trust (AET) such that the deceased’s assets automatically get transferred to the AET on death, but that is complex and not without consequences. I’ve never seen it myself.
Thank you for your answer.
This is a quote from manulifeim.com
There’ll be a deemed disposition, at FMV, of trust assets on your passing (for an alter ego trust) or on the death of the surviving spouse (for a joint partner trust), which means the trust’s assets will be taxed within the trust and can’t be taxed in the deceased’s hands personally.
This is why I’m worried that the capital gains would be taxed inside the trust and it’ll be taxed at the highest rate.
I’m not an expert on trusts, but typically the AET would have been set up such that it gets wound up upon death of the settlor - this would be specified in the trust deed or whatever legal instrument was used. So, typically, any capital gains get allocated to the beneficiaries, where they would report the income on their T1s like any other capital gains. That decision, of course, should be specified in the taxpayer’s will, or left to the executor, and reported appropriately by the accountant who prepares the T3.
I can’t believe Manulife would have this advice. AET’s are set up to be a conduit, nothing more. Income flows through to the beneficiaries. They’re a pain in the ass because it’s impossible to file them on time. Unless the income is all in the form of capital gains or T5’s, you don’t get T3 income slips until the March 31 deadline, hence the problem. A main purpose of an AET is to avoid probate fees, plus the related bonus of keeping curious eyes from seeing the details of your estate. We should all have such a problem.
Well…it turns out I was totally wrong. The correct sequence is this:
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Deemed disposition on day of death
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Usual income allocated to T1 final return but capital gains from deemed dispositions will be claimed on the T3. The trust ends on day of death. The capital gains are not allocated.
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Stub T3 will go from day after death to Dec. 31. Income will be allocated to new beneficiaries. Assets have new Adjusted Cost Base which was the FMV from the deemed disposition that happened on day of death.
Hope this is the final post I will do on this topic.