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. 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 that arises on death 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.
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:
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