Testamentary trusts are trusts that arise on and as a consequence of the death of a person, and are powerful tools if you wish to maintain a degree of control after death on how the trust funds are to be administered, when they can be paid and on what conditions. With the right trustees at the helm, testamentary trusts can facilitate long-term inheritance protection and management so that your beneficiaries have what they need at appropriate times. In this article, we discuss several types of testamentary trusts that can be customized as part of your estate plan.
Minor and Adult Children
You may wish to give a gift to a minor child with the intention that it be used for that child's benefit. In Ontario, minors are not capable of managing property until they attain the age of 18 years. If a minor's entitlement in your estate exceeds $10,000 and is not held in a trust, the funds must be paid into court until the child attains the age of 18 years and become eligible to receive them. While some young adults have the financial knowledge of how to manage their money, most do not. A later age for a large sum of money to be a paid to a beneficiary may be preferred by many, such as 25 or 30 years old.
By creating a trust for minor children, assets can be administered by a trustee of your choosing in the best interests of the child and in a controlled manner until an age that you can predetermine, usually at a life stage when the child is emotionally mature and ready to manage their own inheritance. You can also design the trust to pay portions of the funds to the child in staged distributions.
In addition, you can customize a testamentary trust to hold a potentially contentious asset such as a family cottage to reduce possible conflict among adult children. By allowing the trustees to make discretionary decisions about the cottage, they would be able to exercise control on many aspects, including how the property is to be used going forward, possibly providing funds to maintain it, and how it is eventually disposed of.
In Ontario, many disabled individuals receive critically important benefits from government programs such as the Ontario Disability Support Program ("ODSP"). ODSP recipients must adhere to strict rules on prescribed asset limits or risk being disqualified from receiving benefits. This poses a problem – how can you leave a disabled beneficiary an inheritance if the funds will push the ODSP recipient's assets above the prescribed limit and disqualify them from receiving such benefits?
A Henson trust is an absolute discretionary trust intended to preserve a disabled beneficiary's entitlement to payments made under the ODSP where the trustee is given ultimate and unfettered discretion regarding any payments made to the disabled beneficiary. Because the trust assets will never vest in the beneficiary, the inheritance will not increase their asset levels and assets that far exceed the prescribed limit can be held in the Henson trust and enjoyed, subject to certain limits, by the beneficiary for their lifetime. As a result, the beneficiary can continue to receive ODSP benefits. Combined with the advantage of having the trust assets managed prudently and invested on the disabled person's behalf when the person may not be able to do so themselves, a Henson trust is a must for any beneficiary receiving government benefits.
Spendthrifts and Beneficiaries with Addictions
Spendthrifts and beneficiaries with addictions can benefit from both the financial management and creditor protection aspects of testamentary trusts. A trustee can manage the funds for individuals with a track record of irresponsible spending for as long as you intend, and the funds can be paid out only under certain conditions to prevent the inheritance from being squandered or spent recklessly. Similarly, for a beneficiary with a substance dependency or gambling addiction, a testamentary trust is essential.
Some beneficiaries can weave in and out of addiction, so the flexibility and discretion that a testamentary trust gives to a trustee to manage the trust in the best interests of the beneficiary can allow the beneficiaries to benefit from the gift while also ensuring that the funds are used responsibly and are not spent on gambling, alcohol or drugs, or in ways that might be harmful to the beneficiary.
If you are in a blended family or in a second marriage, including a testamentary spousal or common law partner trust can be highly beneficial. A spousal trust would hold your estate (or a portion thereof) in trust for your surviving spouse for the remainder of their life, allowing the trustee to pay out income to them so that they may continue to enjoy the standard of living that they are accustomed to. If properly drafted, a spousal trust can qualify as a qualifying spousal trust under the Income Tax Act, which would allow for the deferral of capital gains tax that would otherwise be applicable at your death and avoid the 21-year deemed disposition rule that generally applies to trusts.
As can be seen, there are many benefits to testamentary trusts. However, the trust provisions in your will must be drafted with extreme care so that they are appropriate for your family's circumstances, reflect your wishes for how your estate is to be administered and deter future litigation.
Originally published by Your Guide to Charitable Giving and Estate Planning, Fall 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.