It is common to distribute your assets on death outright and directly to your loved ones. A testamentary trust is an estate planning strategy that provides an alternative.  It allows you to control the timing and distribution to your beneficiaries, in accordance with your wishes.

Generally, this type of trust is only created within your Will, and comes into existence or is funded on your death. Directions for the creation of a testamentary trust and the terms of the trust should be specified in your Will. The Will should identify, among other things, the amount of money or other property to be held in the trust, the beneficiaries of the trust property, the trustees and their powers, the duration of the trust, and when and how distributions are to be made.

While there may be a financial benefit to having your Will create a trust (from a tax perspective), consider the following common non-financial scenarios that you may be able to have input on, even after you pass away:

1. Protecting beneficiaries with special needs: If you have a disabled child, ensuring that they are well taken care of after you are gone, both physically and financially, is likely top of mind. A testamentary trust may allow you to set aside funds and name a trusted individual to take care of your disabled child’s financial needs. In addition, leaving the funds directly to that child may jeopardize their eligibility to qualify for provincial disability support, whereas having the assets placed in a testamentary trust will generally not impact this support.

2. Beneficiary with poor money management skills: You may have a particular child or person you wish to benefit from your estate who may not be good at handling their financial affairs, or who may have addiction issues. A testamentary trust may allow you to ensure that the beneficiary does not exhaust the trust assets too quickly. Remember, your Will appoints a trustee and sets out how they should handle distributions to a beneficiary. If you are concerned about undue pressure or influence on the trustee by a beneficiary, you may also consider appointing a corporate trustee, such as Royal Trust.

3. Control over timing of distribution of assets: If you have a substantial estate and your children or other beneficiaries are relatively young, you may feel that it would not be a good idea to leave a significant amount of money to your beneficiaries until they have reached a certain level of maturity. You may feel that they are too young to handle a sizable estate before the age of 30 or 35, for example. Establishing a trust may allow you to control the timing of distributions of assets to your beneficiaries by setting out the age that they can access funds.

4. Blended family: If you are in a second marriage or common-law relationship and you have children from a previous marriage or you have children from different relationships, a testamentary trust may be a suitable vehicle to provide for all your desired beneficiaries who are part of your family. For example, you can create a testamentary trust that provides for your spouse during their lifetime and, on the spouse’s death, distributes the trust assets to your children from your previous marriage or relationship and not to your spouse’s children or heirs. Alternatively, you may want to establish more than one testamentary trust for different family members that are managed by different trustees.

5. Creditor protection: If the testamentary trust is properly structured, it may be possible to protect the assets in the trust from the creditors of the beneficiaries including marital creditors (divorce).

It is important to consider all of the costs and complexities involved in setting up and administering a testamentary trust. You may still prefer an outright distribution of your estate due to its simplicity and potential to minimize probate fees.

If there are reasons why a testamentary trust makes sense for you and your family, you should consult with a qualified legal and tax advisor to determine how to achieve your estate planning objectives. It is also important to make sure that your financial advisor knows that you have included testamentary trusts in your Will, as they will need to ensure that your account structures and designated beneficiaries are not in conflict with what your Will indicates.