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Testamentary Trust Definition

Testamentary trust definition: a trust or estate created on the day an individual dies. Its terms are established by the will or by court order in relation to the deceased individual’s estate. Typically, a testamentary trust is funded by the estate, but it may also be funded by life insurance.

A testamentary trust can be created for numerous reasons. For instance, a parent can leave money in the care of a trustee to be given to a child when the child reaches a certain age. This is often done to protect adult children who are too young to handle large amounts of money. It can also be done for minor children, as minor children cannot inherit until the reach age 18.

Other reasons for creating a testamentary trust include providing income for disabled beneficiaries who may lose government assistance if they own more than a certain amount of assets. A trust could also be set up for a spouse who doesn’t have the skills to manage money. Another good reason to set up a testamentary trust is to provide beneficiaries with annual income in a way that minimizes tax.

You might also want to create a testamentary trust to hold title to assets that will be distributed to creditors if the estate is insolvent (more debts than assets), for tax reasons, or to preserve pension benefits that are payable to the estate.

Testamentary trusts used to be used to save beneficiaries significant tax dollars but changes to Canadian tax law in 2016 have eliminated those tax advantages. However, there are still many good reasons to include a testamentary trust in a will. Without the tax benefits, the cost of setting up and maintaining the trust may not be worth keeping it in the long term, but if your trust is drafted correctly, it will give the trustee the authority to end the trust if doing so makes financial sense.

It should be noted that the trustee (the person who holds the property) has a fiduciary duty to the person who created the trust and the beneficiaries of the trust. The trustee has legal title over the property in the trust but does not have the legal right to benefit from the property. This right is called equitable title and it belongs solely the beneficiaries of the trust.

Testamentary Trust Vs Family Trust

A testamentary trust comes into effect when the person who created the trust dies. A family trust is used to transfer future income and wealth to a person’s family members. Family trusts may be used in estate freezes, protecting assets from creditors, or as an alternative to a will to distribute assets to discretionary beneficiaries. They survive death, with the deceased person being replaced by another trustee.

Creating a Testamentary Trust

Working with your estate lawyer, you specify how the trust should be created and the trust’s terms in your will. Some of the things to specify include:

  • The amount of money (or other property) the trust will hold
  • Who the beneficiaries of the trust are
  • Who the trustees are, and their powers
  • How long the trust will remain in effect
  • When and how distributions will be made

The person named as executor in the will is usually the trustee but another person can be appointed trustee if you wish.

(Note: the term “personal representative” is the current legal term used to refer to an executor/executrix, administrator/administratix, and judicial trustee.)

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With the sudden but separate passing of two family members last year, I became the Executrix for both Estates simultaneously. Imagine the challenges & legal complexities of navigating these unusual circumstances. JE Fletcher Professional Corporation guided me in a highly professional, experienced manner through to probate. I am truly grateful for the exceptional service this firm provided to me during this most difficult time of my family’s life.

- Michelle F.