Welcome Changes To New Life-Interest Trust Rules

In January 2016, the Department of Finance released draft legislation proposing amendments to the new life-interest trust¹ rules, which came into effect for 2016 and subsequent tax years. As noted in our November 2014 release, Surprise legislation impacts estate planning, the new rules could adversely affect common estate planning strategies and, consequently, have been a cause for concern.

The new rules

When a beneficiary of a life-interest trust passes away, the trust is deemed to dispose of its assets at their fair market value. Under the new rules, any capital gains and income recognized as a result of this deemed disposition, as well as any other income earned in the year of the death of a life-interest trust's primary beneficiary, are required to be taxed in the hands of the beneficiary in the deceased's final income tax return, instead of in the trust (as was the case under the previous rules).