Estate Planning/ Testamentary Trusts
It is common to distribute your assets on death outright to your loved ones being your heirs and beneficiaries. A testamentary trust is an alternative to a direct or outright distribution of estate assets. It allows you to control the timing and distribution of assets to your beneficiaries. When preparing a Will, many inexperienced lawyers will overlook the benefits of testamentary trusts. Placing assets in trust can provide significant estate planning benefits as part of an overall estate plan. The assets held in trust can be invested and managed by the trustee of the trust, who may distribute the income and capital to the beneficiaries in accordance with your wishes stated in your Will. While testamentary trusts no longer provide the significant favourable tax benefits that they once provided, there are still many advantages to incorporating them in your estate planning.
What is a testamentary trust?
A testamentary trust is any trust or estate that is generally created on the day a person dies through a Will. A testamentary trust creates a legal relationship between the settlor (the “testator”) of the trust and the trustee (often the “executor” of the Will) and the beneficiaries of the trust (often family members or other individual beneficiaries of the testator or charities.) The terms of the trust can provide for the payment of income or capital or both to the beneficiaries. Either the interests of all beneficiaries can be fixed in the trust or discretion to allocate the income and/or capital among the beneficiaries can be left to the trustee.
Generally speaking, this type of trust is only created by a deceased individual and comes into existence or is funded on death of the individual. A testamentary trust can also lose its status for tax purposes if any property is contributed to it by anyone other than the deceased individual as a consequence of that individual's death. Your Will normally specifies the directions for creation of a testamentary trust and its terms, including the amount of money or other property to be held in the trust, the beneficiaries of the trust property, the trustees and their powers, the duration of the trust, and when and how the trustee is to make distributions.
Testamentary trusts may have a lifespan of only a few years or they may continue for many years after the initial administration of your estate has been completed. Only assets passing through your estate can be transferred into a testamentary trust (except for life insurance proceeds that may be paid directly to the trust, rather than to the estate) so probate taxes will normally be applicable and have to be paid by your estate. Once your testamentary trust is established, an annual trust tax return will need to be prepared by an accountant, which creates an annual additional expense for your estate.
What are spousal testamentary trusts?
In a spousal testamentary trust, a testator leaves assets to a testamentary trust for the benefit of the testator’s spouse, usually for the spouse’s lifetime. The terms of the trust will provide that all or part of the income be paid or be payable to the spouse during his or her lifetime, and may include access to the capital in the trustee’s discretion or at the request of the spouse. On the spouse’s death, the assets pass to other specified beneficiaries (typically children or charities) either outright or in a continued trust.
A trust established in this way provides additional tax benefit in that the assets initially transferred to the spousal testamentary trust are “rolled” into the trust at the testator’s adjusted cost base. In this way, the tax that would otherwise be payable on any capital gain inherent in those assets is deferred until the second spouse’s death.
When should I consider using a testamentary trust?
A testamentary trust can be useful in many situations including:
Prior to January 1, 2016, one of the benefits of having a testamentary trust was favourable income tax advantages. However, the graduated tax rates that once applied to testamentary trusts were eliminated and replaced with flat top-rate taxes, with some exceptions. As a result, the tax benefits once available by way of testamentary trusts are no longer available. The creation of a testamentary trust will result in annual fees, and it is therefore imperative that you conduct a cost/benefit analysis to ensure that this structure is a viable option for you as part of your comprehensive estate planning. If you have a testamentary trust in your current estate planning, you should contact a lawyer at our firm in order to review your Will and advise you of recommended changes that should be made given the elimination of preferable tax implications in order to achieve your goals. Often, an outright distribution to your estate is more practical given its simplicity and potential to minimize probate fees.
For over 40 years, clients have trusted in our ability to explain their rights and obligations with respect to testamentary trusts and estate planning. We are confident that you will appreciate our professional and personalized service. We invite you to browse our website and read the positive things others have to say about us. To benefit from our knowledge and experience with respect to your estate planning, please contact 519-884-0034 or send us an email. Many of our clients are referred to us by former and current clients, as well as by lawyers, accountants, and financial advisors. We serve clients in Kitchener, Waterloo, Cambridge, Guelph and surrounding areas.