Strategy 8 – Testamentary trusts

Dec 20, 2018 | Joshua Opheim


Manage the transfer of your estate

For families concerned about intergenerational wealth transfer, an updated Will with a testamentary trust provision is an indispensable tool. A testamentary trust is a type of trust established through your Will that enables you to give assets to your beneficiaries with certain conditions that you have specified.
A testamentary trust can provide significant estate planning opportunities. You specify an amount of money or other property to be held for a specified period for beneficiaries you have identified and on the terms directed by you. This allows you to create solutions to complex family situations. For example, you may wish to leave your children a portion of your estate, but you may feel that they should not receive their inheritance until they are old enough to manage it responsibly. Through your Will, you would direct your chosen trustees to hold and invest the inheritance in a trust for your children until they reached the age that you specified. Alternatively, you could give your trustee full discretion as to the amount and timing of trust distributions to the beneficiaries.
Previously, testamentary trusts had access to graduated rates. However, in 2016, these graduated rates for testamentary trusts were replaced with flat top-rate taxation, subject to two exceptions. An estate that designates itself as a “graduated rate estate” will generally be subject to graduated rate taxation for the first 36 months of its existence. As well, graduated rates will continue to apply in respect of testamentary trusts for the benefit of disabled individuals who are eligible for the federal Disability Tax Credit where the trust and the qualifying beneficiary have jointly elected for the trust to be a “qualified disability trust” for a particular taxation year.
Family wealth management tip
A testamentary trust provision in a Will may make sense for the following people:
  • Individuals in second marriages
  • Disabled or minor beneficiaries
  • Parents concerned about spendthrift beneficiaries
  • Parents concerned about an inheritance being accessed by a son-in-law or daughter-in-law
  • U.S. citizens living in Canada
  • Parents who wish to provide for successive generations or preserve the continuity of ownership of family property

While these measures may increase the amount of tax the trust will pay on investment income, the negative tax effects may be reduced by taking certain steps. For example, where the terms of the trust allow income to be distributed to the beneficiaries, the trustee can elect to pay out the trust income to the beneficiaries. In this case, the income will be taxed at their marginal tax rates. This may result in some tax savings if their marginal tax rate is lower than the trust’s tax rate.

Testamentary trusts are generally created with assets passing through an estate. Therefore, probate taxes (negligible in Alberta and Quebec) will likely have to be paid. However, there will be no probate tax for a properly structured testamentary trust funded with insurance proceeds.
If you intend to have your assets pass through your estate so they can fund a testamentary trust, then Joint Tenancy with Rights of Survivorship accounts (not applicable in Quebec) may not be appropriate, and you may also need to restructure the beneficiary designations.
Speak to us if you are interested in having a Will and estate review from an RBC Wealth Management Will and Estate Consultant. Based on your situation, this specialist can provide Will and estate planning recommendations such as the suitability of a testamentary trust, vacation property
succession planning strategies, the benefits of a secondary Will to avoid probate tax on private company shares and more.
For more information, ask us for a copy of our article on testamentary trusts.
You may choose to utilize the services of a professional trust company such as RBC Estate & Trust Services* to act as your trustee for your testamentary trust. One of the key benefits of using a trust company is the security of knowing you areengaging experienced professionals to protect the interests and requirements of your testamentary trust. If you would like the input of a family member or friend on personal matters related to your trust, you can name RBC Estate & Trust Services as your trustee and appoint a family member or a friend as co-trustee. This will relieve the co-trustee of worries about managing the trust assets alone, and they will have access to the sound financial insights of the trustee. Speak to your RBC advisor regarding the trustee services available at RBC Estate & Trust Services.