What is the difference between a living trust and a testamentary trust in Ontario?

A living trust (also called an inter vivos trust) is set up and operates while you are still alive. A testamentary trust, by contrast, is created by your will and only comes into existence after you die. Both are valid tools in Ontario estate planning, but they serve different purposes and have different tax and administrative implications.

Living trusts can be used to transfer assets outside of your estate, potentially avoiding probate and keeping matters private, since wills become public documents once probated. They also allow you to manage how assets are distributed if you become incapacitated. However, living trusts generally do not provide the same income-splitting benefits they once did, due to changes in federal tax rules around trust taxation.

Testamentary trusts continue to offer some flexibility for trustees to manage and distribute income to beneficiaries in a tax-considered way, subject to current income tax rules. They also allow you to set conditions on inheritances, such as age milestones or specific purposes like education.

The right choice depends on your goals, family situation, and the size of your estate. A lawyer can help you determine which structure — or combination of both — fits your needs.