Some estate plans, in addition to having a will, can include a trust structure known as an inter-vivos trust. Such trusts are popular tools to reduce probate related expenses, manage family dynamics or maintain the privacy of the family or the assets under their control.
The trust deed (or trust indenture) establishes the trust, sets forth all of the terms and conditions for the operation of the trust and the distribution of its assets. Assets within an inter-vivos trust do not form any part of the estate as they have already been “disposed” of, because the trust is their new “owner”. In this regard, inter-vivos trusts could be considered a form of estate pre-planning.
What is a testamentary trust and when does it get used?
While inter-vivos trusts have a number of benefits, they are not for everyone as they can be relatively expensive to create, the former owner of the trust property may lose significant control of the assets once placed in the trust and there can be materially negative tax consequences. Nonetheless, trusts are among the most valuable tools in estate planning and their use has become increasingly common for a variety of situations.
However, when an inter-vivos trust does not meet the needs of the asset owner, a testamentary trust may be a viable alternative. Unlike an inter-vivos trust that is created in one’s lifetime, a testamentary trust is created via your will, and it comes into being only upon your death.
Once used primarily for underage children until they reach the age of majority, testamentary trusts are now commonly used to defer distribution of the bequest until the beneficiary turns 25 to 35 years of age or even beyond. Of course, the size of the trust also helps determine how long it will exist, as does the financial wherewithal of the beneficiary. If spendthrift children are the beneficiaries, their associated trusts may extend for a very long time.
Commonly referred to as a Henson Trust, testamentary trusts are used commonly by individuals intending to benefit a special needs beneficiary. Typically existing for the lifetime of the special needs beneficiary, such testamentary trusts can provide income and capital to the beneficiary, to maintain or advance their quality of life. Until recently, these trusts had limited benefit in Alberta as once the value exceeded $100,000.00, the beneficiary was no longer eligible for the Assured Income for the Severely Handicapped (AISH) program. Effective January 2020, the asset limit no longer exists with Alberta families now having an additional estate planning tool. Nonetheless, families should seek qualified planning advice as there are other planning considerations when there is a special needs beneficiary. These considerations include the suitability of a trustee given the time horizon of the trusts, anticipating the income earned in the trust to maintain AISH eligibility and whether it is appropriate to appoint a trustee who would benefit from the trust upon the death of the special needs beneficiary.
Testamentary spousal trusts are another common planning option. They allow for rolling in of capital assets from the deceased’s estate into the trust at the adjusted cost base of the deceased partner. Spousal trusts are commonly used in second marriages when there are children from prior relationships. Spousal trusts can also provide some asset protection in the event of a surviving spouse’s remarriage, and can ensure that the children from the original marriage remain in the picture as the contingent trust beneficiaries. It is important to note that some forms of assets, such as RRIFs and RRSPs, are not eligible to be held in any form of a testamentary trust.
Because of their structure, testamentary trusts also provide a measure of asset protection for the bequest. There are three parties to a trust: the settlor (the testator - yourself), who creates and funds the trust through their will, and specifies the terms as to how it will operate; the trustee (usually your executor), who operates the trust in accordance with the terms set forth in the will; and the beneficiary, for whose benefit the trust was established. In law, the trustee is the legal owner of the trust’s assets, and manages the trust for the benefit of the beneficiary. The beneficiary is the beneficial owner, but does not have the ability to direct how the trust is managed or how the trust assets are used. It is because of this legal relationship that the asset protection qualities of the trust can arise.
What about my executor and testamentary trusts?
As the executor is responsible for ensuring your estate plan is implemented, including the establishment and ongoing administration of any testamentary trusts (thus making your executor your trustee), as well as the preparation of estate and trust income tax returns.
When considering a testamentary trust in your will, a trust company or corporate executor can also be named as a fiduciary. For a fee, a corporate executor will administer your estate as per your wishes outlined in your will, and it is important to note that all trustees, including corporate trustees, are entitled to receive compensation for operating the trust. At ATB Wealth, our partner, Cidel Trust Company, which is headquartered in Calgary, provides corporate executor, trustee, and attorney services.
This document has been prepared by ATB Wealth. ATB Investment Management Inc., ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund) and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth. ATB Financial is a registered trade name/trademark of Alberta Treasury Branches.
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