Many of us will be passing assets, such as money or a family cottage, to the next generation upon death; however, we may not want our heirs to have control over these assets. Setting up a trust allows you to create and enforce the rules around how an asset can be used or distributed, even after death.

A trust can be formal, with a trust agreement drawn up by a lawyer in a will, or can be informal, by naming beneficiaries on life insurance policies and certain accounts, such as RRSPs. The trust document names a trustee who will enforce the rules that are created within the trust on behalf of a beneficiary.

Currently, testamentary trusts also have preferential tax treatments, and are taxed according to the graduated rates afforded to individual taxpayers. This makes them a valuable tax planning tool for beneficiaries with high incomes, as it doubles their access to the lowest tax brackets, reducing their overall tax burden. This may change in the future, as the most recent federal budget proposed changes to the way testamentary trusts are taxed. However, there are many non-tax related reasons to consider testamentary trusts.

If any of the following points are relevant to you, you may want to consider having a testamentary trust as part of your estate plan.

  • You have minor children as beneficiaries of your estate
  • You have beneficiaries, other than minor children, who are financially dependent on you and will remain so for their lives
  • You have beneficiaries that do, or will have, high incomes and could benefit from tax savings provided by testamentary trusts
  • You have had more than one marriage and want to provide for your current spouse while they are alive but want your estate to ultimately go to your children, not your spouse’s children
  • You want to retain some control over how your assets are handled
  • You would like to prevent your assets from ending up in the hands of an estranged spouse of one of your children
  • You have a large estate and would like to preserve your wealth for future generations
  • You have ongoing financial obligations, such as spousal and/or child support payment
  • You value privacy. Trusts are private documents, while wills must go through the court system during probate and are therefore a matter of public record.

Have a discussion with your financial advisor to find out if you would benefit from this estate planning strategy.