A testamentary trust is a type of trust only takes effect upon their death. It is typically created in a will. It is created to hold, protect, and distribute a person’s property and assets for the benefit of beneficiaries. Here are 5 key aspects of a testamentary trust:
Trusts created in a will
Unlike some trusts, which are established during a person’s lifetime (called an inter vivos trust), a testamentary trust is formed as part of an individual’s will and only takes effect upon that person’s death. The trust provisions are included in the will, outlining the terms and conditions under which the trust will operate. When it comes time to activation, banks often mistakenly ask the trustee to provide them with the trust “deed”. However, trust “deeds” or “indentures” are only for inter vivos trusts. The will is the document that establishes most testamentary trusts, and that’s what the bank needs to see.
Testamentary trust activated upon death
A testamentary trust only comes into effect upon an individual’s death, typically after the will has gone through the probate process. Once set up, executors typically announce a distribution to all beneficiaries of the estate. If there is a trust created in the will the person named as trustee is responsible of receiving those assets and placing them into trust account at a financial institution. From there, depending on the terms of the trust, the trustee may distribute to the beneficiaries of the trust.
Trustee appointment
The person creating the will, often referred to as the testator or will-maker, appoints a trustee to administer the trust and carry out its terms and provisions. The trustee has a fiduciary duty to act in the best interests of the beneficiaries according to the instructions set out in the will. The trustee is often the same person as the executor for administrative ease, although this is not necessary.
Tax considerations of a testamentary trust
Testamentary trusts are subject to specific tax rules and may offer certain tax benefits or potential tax liabilities depending on how the trust is structured. Only a few trusts qualify for favorable tax rates in Canada. Among these are spousal trusts and qualified disability trusts (“Hensen Trusts”). It’s strongly recommended to seek advice from a qualified tax professional or estate planning lawyer who can provide tailored advice based on your individual circumstances and help you optimize tax efficiency within the legal framework.
Flexibility of terms of a testamentary trust
The testator has a considerable degree of flexibility in defining the terms of the trust, which can vary greatly depending on the individual’s wishes. The testator can specify how the assets should be managed, distributed, and utilized for their appointed beneficiaries. Specific instructions can include distributing the assets in a lump sum, installments or delaying distribution until a certain age.
Next steps
To determine if a testamentary trust is suitable for your estate planning needs, it is important to consult with an estate planning lawyer in British Columbia. They can provide you with peace of mind that your testamentary trust is properly structured, legally valid, and in line with your wishes and intentions. Book in with a lawyer for a testamentary trust in Vancouver, Burnaby, North Vancouver or Squamish today.
