A testamentary trust is a trust created in a person’s Will which takes effect upon the person’s death. The terms of the trust are set out in the Will, and direct the trustee, who is appointed in the Will, to hold and invest the assets that will form the trust for a beneficiary for a period of time after the person’s death.

Testamentary trusts are used where the person making the Will does not want the beneficiary to receive his or her share immediately upon the person’s death. This may be because the person making the Will believes that the beneficiary is unable to manage the inheritance directly due to immaturity, inexperience with financial matters, personal difficulties, or disability.

Prior to 2016, testamentary trusts were also established for tax reasons. This was because a testamentary trust was taxed like an individual, at graduated rates of tax, which allowed the income generated by the trust assets to be split or divided between the trust and the beneficiaries, often resulting in tax savings. Effective December 31, 2015, the graduated rates of taxation will only apply to the income of testamentary trusts for 36 months following the date of death, and after that any income retained in the trust will be taxed at the highest rate of tax applicable to individuals. An important exception to these rules is a testamentary trust for a disabled individual (called a “qualified disability trust”) which allows the income accumulated in the trust to be taxed at graduated rates of tax applicable to individuals.

Below are some examples of testamentary trusts that may be included in a Will:

Trusts for Minor Children. A parent can direct the trustee to hold the assets forming the trust until a child reaches an age or ages specified in the Will. For example, the Will might provide for a distribution of one-quarter of the capital of the trust to the child when the child reaches age 21; one-half of the remainder at age 25, and the rest at age 30. Until the child reaches those ages, the trustee can be authorized to pay amounts from the income and/or capital of the trust for the benefit, care, maintenance, education or advancement in life of the child.
Trusts for Disabled Individuals. If an individual is receiving benefits (or will ultimately be entitled to benefits) under the Ontario Disability Support Plan Act, a special type of trust, sometimes referred to as a “Henson Trust”, can be established for the lifetime of the individual. A Henson trust is a trust that gives the trustee the absolute authority and discretion over the amounts that are to be paid from the trust for the disabled individual. This type of trust, if properly drafted, will ensure that any government benefits that the individual is entitled to will not be cancelled as a result of the individual’s inheritance. If this type of trust is also a “qualified disability trust”, it will ensure that any income retained in the trust will be taxed at graduated rates of tax applicable to individuals.
Trusts for Cash Gifts for Grandchildren. A grandparent can set aside a specified cash gift for each grandchild. The trustee of the gift can be the parent of the grandchild. The parent can use the cash gift for the benefit, care, maintenance, education or advancement in life of the grandchild, (or for more restrictive purposes, for example, for education or for travel), until he or she reaches an age or ages specified in the Will, at which time the gift will be transferred to the grandchild.
Spousal Trusts. Instead of leaving assets outright to a spouse, a person can create a spousal trust in his or her Will which will provide that the assets forming part of the trust will be held for the spouse for his or her lifetime. The trustee of the trust can be the spouse with or without another person and/or a professional trustee such as a trust company. The trust terms must provide that all of the income be paid to the spouse for his or her lifetime and that only no one other than the spouse can access the capital of the trust. Upon the death of the spouse, the amount remaining in the trust is transferred to the beneficiaries set out in the person’s Will.
Trusts for Adult Children. A person can create a trust for the lifetime (or a lesser period of time) of his or her adult children and his or her family (spouse and/or children). The trustee can be the child with or without another person and/or a professional trustee. The beneficiaries can be the adult child and his or her spouse, children, and grandchildren. The income and capital can be distributed among any one or more of the child and his or her family members. On the child’s death, the amount left in the trust can be transferred to the grandchildren or other beneficiaries that are set out in the person’s Will.