Benefits of a Testamentary Trust

Trusts are one of the most useful tools you can integrate into your estate plan. There are many distinct types, but testamentary trusts are especially important to understand. In essence, this is a trust that is enacted upon the death of the testator, but there’s much more to them than this.

Protection and Management of Assets

First and foremost, a carefully structured and well-funded testamentary trust offers you an excellent degree of control over how the contained assets will be protected and distributed after your death. It will ensure that your assets are managed in the best way possible, as long as you choose an experienced and dependable trustee. In addition to this, testamentary trusts can optimize tax-efficiency and help to shield assets from creditors and matrimonial claims.

Saving on Probate

Although testamentary trusts don’t offer the same protection against probate that living trusts do, they still stand to benefit you to minimize taxation. For example, proceeds from a life insurance policy can be paid directly into a testamentary trust without passing through probate, which could help to relieve overall tax burden. Additionally, assets in a testamentary trust will not be subject to probate a second time upon the death of the primary beneficiary.

Reduction of US Tax Liability

Estate taxation laws differ between the United States in Canada. Unlike the CRA, the IRS applies an actual estate tax to inherited assets. It is not uncommon for Canadian testators to have heirs and/or beneficiaries living abroad. If the intended recipients of certain assets are residing in the United States or are US citizens, bequeathing those assets via a testamentary trust can help to limit the depletion of your beneficiaries’ US estate and gift tax lifetime exemption and prevent future taxation of your legacy.

Inheritance for Blended Families

One of the more common family circumstances calling for a testamentary trust is a blended family. More specifically, it adds more flexibility in the case of a second marriage. A testator can use a testamentary trust to leave behind an inheritance that is temporarily designated to provide income for the second spouse during his or her lifetime. Upon the death of the second spouse, the capital can then be passed on to the testator’s children from his or her first marriage.

Income Splitting

Also known as income sprinkling, this strategy allows business owners to reduce overall tax burden by distributing company dividends to family members who are subject to a lower marginal tax rate. In the case of a testamentary trust, the trustee would distribute capital from the trust to beneficiaries who would otherwise have little to no income. For information on tax law developments pertaining to income splitting, check out our article from earlier this year.