Testamentary Trusts

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Testamentary trusts are created as a consequence of the death of the testator in accordance with the testator’s will.  The terms are set out in the will and determine the timing and quantity of distributions to each beneficiary.

Unlike inter vivos trusts and life interest trusts that are subject to a flat highest marginal rate of tax applicable to individuals, testamentary trusts are subject to marginal rates applicable to the individuals.  Availability of this graduated tax rate is restricted to the first 3 years of the existence of the estate (Graduated Rate Estate or GRE), other than an estate for a disabled beneficiary.  After 3 years the trust is subject to the highest marginal rate of tax.

Take Advantage of Graduated Rate Estate

 The GRE designation of a testamentary trust brings key benefits such as:

  • Access to the lower marginal tax rates;
  • Simpler and more flexible donation rules;
  • Postmortem tax planning in the context of ownership of private company shares – the ability to reduce the potential for double or even triple tax on death. With proper planning, when the corporation is wound up, the estate could end up with a capital loss and pay a tax-free dividend to the beneficiaries of the estate.  That type of tax planning is not allowed for non-GRE estates under what is known as stop-loss rules.  

Proper estate planning can lead to large income tax savings, particularly for shareholders of private company shares.

Do not lose the GRE status

If a GRE loses its status as a testamentary trust, the GRE status will be lost along with the benefits.  Without proper planning, a testamentary trust can be tainted by actions such as another person contributing to the estate which could happen if a beneficiary borrows money from and then re-contributes to the trust or the trust borrows money from related persons to pay the deceased’s debts.

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Testamentary Trust

Frequently Asked Questions

1. What is a testamentary trust?

A testamentary trust is a trust that is created through a will and only takes effect upon the Will maker’s death, managing and distributing assets to beneficiaries.

2. How does a testamentary trust differ from a living trust?

Unlike a living trust, which is created and effective during the settlor’s lifetime, a testamentary trust is established through a will and comes into existence after death of a Will maker.

3. What are the benefits of a testamentary trust?

Benefits include controlled asset distribution, tax planning advantages, and protection of assets for beneficiaries who may need financial oversight.

4. Can a testamentary trust help in tax planning?

Yes, testamentary trusts can offer tax benefits, particularly in managing how and when income is distributed to beneficiaries, potentially reducing their tax burden.

5. Who can be a trustee of a testamentary trust?

The Will maker can appoint as an executor a trusted individual or a professional fiduciary to manage the trust after their death.

6. What happens if I do not leave a will?

Without a will, your assets will be distributed according to the intestacy rules set out in legislation. Beneficiaries under intestacy maybe not the ones you wanted to benefit, to distribute an intestate’s estate someone will need to apply for letters of administration for the court to approve a person that will be dealing with the assets, the assets will be likely distributed directly to beneficiaries under intestacy rules without the additional control and protection a testamentary trust may provide.

7. Can a testamentary trust protect my beneficiaries from creditors?

Potentially, testamentary trusts created under the will with special terms may provide a layer of protection.

8. How can a testamentary trust control asset distribution?

The will allows you to set specific terms and conditions for how and when your assets are distributed to beneficiaries, offering greater control over their financial future.

9. Is a testamentary trust suitable for minor children?

Yes, testamentary trusts are often used to manage assets for minor children until they reach a specified age or milestone.

10. How do I set up a testamentary trust with Granville Law Group?

You can set up a testamentary trust by working with Granville Law Group’s estate planning experts, who will guide you through the process of drafting your will.