A testamentary trust, as defined under subsection 108(1) in the Income Tax Act, is a trust that arose “on and as a consequence of the death of an individual”. As of January 1st, 2016, to eliminate the perceived abuses of individuals creating multiple testamentary trusts in a Will, each benefiting from marginal income tax rates, the government introduced rules to ensure only an estate which meets certain conditions of being a graduated rate estate and a qualified disability trust created on death would benefit from those income tax advantages. So, why would there be a need to create more than one testamentary trust in a Will now?
There are non-tax reasons that testamentary trusts can assist with as part of your estate planning. They help to:
Protect the property/asset from creditors of the beneficiaries.
Prevent beneficiaries from gaining control of assets.
Manage and protect the property/assets based on beneficiaries’ age, marital situation, or disabilities and for those beneficiaries who are spendthrifts.
Assist with reducing probate fees in the event of a beneficiary’s death.
Allocate income from the assets held by the testamentary trust to minor beneficiaries without being caught by the kiddie tax and tax on split income rules.
Provide for your spouse during his/her lifetime but provides the ability to distribute the assets to whomever you decide after your spouse passes away, instead of relying on your spouse to follow through with your wishes.
Testamentary trusts still provide an effective way to achieve your estate planning objectives but will require careful thought of the trustee(s) to manage your property/assets and consideration of the costs to administer vs. its benefits.
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