Despite budget changes, testamentary trusts still useful

National Post


Testamentary trusts took a hit in last week’s federal budget due to the government’s proposal to start taxing them at the highest marginal rate after 2015, but there are numerous other non-tax reasons why a testamentary trust may still make sense as part of your estate plan.

A testamentary trust is a type of legal arrangement in which an estate trustee holds and manages the deceased’s property for the benefit of someone else.

One reason to still consider having a testamentary trust in your will is to administer and manage inheritances for minor beneficiaries until they reach the age of majority. This becomes particularly important in the context of a life insurance policy, where it’s often advisable to set up a life insurance testamentary trust to receive the death benefit.

An added benefit is that by naming the trustee of the trust as beneficiary of the life insurance policy, the funds flow outside the estate and therefore may not become subject to probate tax, depending on your province of residence.

Another benefit of using a testamentary trust is that your trustee can maintain control over both the timing and amount of distributions to your beneficiaries. For example, you can specify that 50% of an inheritance would be distributed when the beneficiary reaches age 25 and the remainder at age 30. This level of control could be particularly useful for spendthrift or incapacitated beneficiaries, who may not have the responsibility or capacity to manage funds themselves.

If your main estate planning goal is the preservation of an inheritance, then a testamentary trust is an ideal vehicle. You could, for example, set up a trust in your will that specifies that income from a portion of the assets in your estate will be available to provide for the needs of your surviving spouse or partner during his or her lifetime but that the remaining estate assets will ultimately go to your children upon your spouse’s death.

Finally, some wealthy individuals are using a testamentary trust to motivate the behaviour of their beneficiaries after death. Sometimes referred to as an “incentive trust,” it’s generally designed to provide distributions to your beneficiaries when they engage in desired behaviours, such as attending post-secondary education or engaging in employment or self-employment. For example, the trust may specify that for the beneficiary to receive $50,000 of income from the trust, she must demonstrate, by bringing in a copy of last year’s tax return and CRA assessment, that she earned at least $50,000 on her own.

If you already have testamentary trusts set up in your will, you should speak to your lawyer to determine whether the current wording is still appropriate, given the proposed change in tax law beginning in 2016.