How a Testamentary Trust Works After a Death in Ontario

A will can do more than hand assets over in one step. It can say that part or all of the estate is to be held by a trustee and paid out later, or bit by bit. That holding arrangement is a testamentary trust, and you may be a beneficiary or the person named to run it.

This article explains in plain terms how such a trust begins after a death, who is in charge, how payments are generally handled and what tax and court rules sit in the background. The details always depend on the exact wording of the will.

What makes a trust testamentary

For tax purposes, a testamentary trust is a trust or estate generally created on and because of a person's death. An inter vivos (living) trust is simply any trust that is not a testamentary trust.

In practice this means the trust is created because of the death rather than while the person is alive. How the trust is funded and set up depends on the will and the facts of the estate, so it is worth confirming the steps with a lawyer.

Who controls it and what they must do

The will normally names the trustee and sets out the rules the trustee must follow. The trustee manages the trust property for the beneficiaries. Several legal duties apply to that job.

• Invest with the care, skill, diligence and judgment of a prudent investor.
• Consider the listed criteria when planning investments, diversify to an appropriate extent, and get investment advice if needed.
• A trustee may delegate investment functions to an agent.
• Do not act inconsistently with the terms of the trust, even where the Trustee Act gives investment powers.

A trustee is not liable for an investment loss if the conduct that led to it followed an investment plan or strategy that a prudent investor could adopt. A trustee who has breached the trust but acted honestly and reasonably may ask a court to excuse them, though that relief does not apply to investment losses.

A trustee may apply to the Superior Court of Justice, without starting an action, for the court's opinion, advice or direction on managing trust property.

How money is paid out

Payments follow the will. Some trusts pay income to one person and keep the capital for someone else. Others let the trustee decide when and how much to pay. Changing a trust's terms is a different matter: the Superior Court of Justice may approve a variation on behalf of minors, incapable persons, unborn persons and people with possible interests under a discretionary power, but not for a minor, incapable or unborn person unless it appears to be for that person's benefit.

Trusts are often used for children. A person stops being a minor at 18, and a child generally receives their share at 18 or at the age stated in the will or beneficiary designation. A trust lets the will push that age later, so the trustee holds the money until then.

For someone on ODSP, a true absolute discretionary (Henson) trust is not counted as an asset, no matter how much capital it holds. A payment from it is treated as a voluntary payment because the trustee decides whether to pay. Other trusts are treated differently, and ODSP reviews each trust's terms, so the wording matters a great deal. For non-discretionary trusts, an ODSP recipient's beneficial interest in a trust whose capital comes from an inheritance or life insurance proceeds and is available for maintenance is exempt only up to a combined $100,000, together with the cash surrender value of life insurance.

Tax and costs

A trust's taxable income is generally taxed at the highest individual rate. Graduated rate estates and qualified disability trusts are the exceptions.

A GRE has a deemed tax year-end on the day it stops being a GRE. Trusts are also generally deemed to dispose of capital property at fair market value every 21 years, but for spousal, alter ego and joint partner trusts the first deemed disposition happens on the day the beneficiary spouse dies, or on the later of the two deaths, instead.

On costs, a trustee may pay a trust expense personally and recover it from the trust property, although the court may later disallow it. A trustee is entitled to a fair and reasonable allowance for their care, pains and trouble and time spent, fixed by a judge of the Superior Court of Justice. That rule does not apply where the trust document fixes the allowance.

If something goes wrong, and what to do next

If a trustee dies, leaves Ontario for more than 12 months, refuses or is unfit to act, or is incapable, a new trustee may be appointed in writing. The person named in the trust document appoints. If there is none, the surviving or continuing trustees, or the personal representatives of the last surviving trustee, appoint. If a sole trustee dies, their personal representatives may exercise the trustee's powers until new trustees are appointed, and the sole or last surviving trustee may also appoint a successor by will. The court can also appoint a new trustee, and it can remove an estate trustee on any ground on which it could remove another trustee.

A person who appears to have a financial interest in an estate may bring a motion asking the court to order the estate trustee to pass accounts. Court claims also have deadlines, and the general limitation period is two years from when the claim was discovered.

• Get a copy of the will and read the trust terms closely.
• Trustees: keep records of every receipt, payment and investment decision.
• Beneficiaries: ask for information early and in writing.
• If a beneficiary receives ODSP, get advice before any payment is made.
• Speak to a lawyer or accountant before taking steps on a dispute or tax filing.

Frequently asked questions