- A trustee must invest trust property with the care, skill, diligence and judgment of a prudent investor.
- Since 2016, only graduated rate estates and qualified disability trusts are taxed at graduated rates, and other testamentary trusts pay the top rate.
- A beneficiary cannot be cut off using the creditor-notice protection, and a trustee who acted honestly and reasonably may be excused by the court for a breach of trust.
A will can do more than hand over property in one go. It can create a trust, where a trustee holds assets and manages them for one or more beneficiaries, perhaps for a child, or for someone who should receive money over time. A trust created by a will is called a testamentary trust.
If you are the trustee, you carry legal duties. If you are a beneficiary, you want to know what to expect and what you can ask for. This article walks through the main points.
What a testamentary trust is
When a trust set up in a will begins, and how it relates to the administration of the estate, depends on the terms of the will and your situation, so it is worth confirming with a lawyer. The trustee, often the same person as the estate trustee, holds the assets for the beneficiaries on the terms in the will.
Tax treatment matters. Since 2016, only graduated rate estates and qualified disability trusts are taxed at graduated rates, and other testamentary trusts pay the top rate. An estate stops being a graduated rate estate if it still exists 36 months after the death.
What the trustee must do
A trustee must invest trust property with the care, skill, diligence and judgment of a prudent investor. Under a will, the estate is normally distributed only after the assets are liquidated and the funeral and burial expenses and debts are paid.
Once an estate trustee has given notice to creditors and the time in the notice has run out, they may distribute to the people entitled, and they are not liable for assets distributed if they had no notice of a claim at the time. A creditor can still follow the estate assets into the hands of the people who received them. This protection does not apply to heirs, next of kin, devisees or legatees claiming as such, so it cannot be used to cut off a missing beneficiary.
If a trustee makes a mistake, the court may relieve them wholly or partly from personal liability for a breach of trust if they acted honestly and reasonably and ought fairly to be excused. Investment losses are dealt with separately.
How income and tax work
A trust may deduct income that became payable to its beneficiaries in the year, so that income is taxed to the beneficiary rather than the trust. Trusts other than spousal or common-law partner trusts face a deemed disposition of their capital property every 21 years.
Reporting rules for trusts have been changing, and some arrangements, such as bare trusts, have had temporary filing relief. Check the current CRA guidance or ask an accountant before deciding what your trust must file.
When a child is the beneficiary
Parents are not automatically entitled to receive and manage a child's money. That authority comes only from a court order appointing a guardian of property, and the application must be served on the Office of the Children's Lawyer.
| Situation | What generally happens |
|---|---|
| Child to receive $35,000 or less | In most cases the money need not be paid into court, and can go to the parent the child lives with or a person with lawful custody |
| Child funds of $35,000 or more | Generally paid into court, unless a trustee is named in a will or trust or a guardian of property has been appointed |
Money paid into court is held by the Accountant of the Superior Court of Justice and is paid out at 18, or at a later age set by a will, trust deed or court order. The Accountant charges 3% on receipts and disbursements and a care and management fee of 0.60% a year.
Accountability and next steps
No Ontario law requires an estate trustee to pass accounts at fixed intervals. They need not do so unless the court compels it at the request of a person with an interest, such as a beneficiary or creditor. If the accounts are passed, the judge may make a full inquiry into the whole estate and look into complaints of misconduct, neglect or default.
- Trustees: read the trust terms in the will and keep clear records of every transaction
- Trustees: invest prudently and keep trust money separate from your own
- Beneficiaries: ask the trustee for information in writing and keep copies
- Everyone: speak with a lawyer or accountant before a large distribution or a tax filing
Frequently asked questions
Is a testamentary trust taxed differently from the estate?
Yes, in some ways. Since 2016, only graduated rate estates and qualified disability trusts are taxed at graduated rates, and other testamentary trusts pay the top rate. Income that became payable to beneficiaries in the year may be deducted by the trust and taxed to them.
Do trustees have to pass accounts?
Not at fixed intervals. An estate trustee need not pass accounts unless the court compels it at the request of a person with an interest, such as a beneficiary or creditor.
What happens to a child's inheritance?
It depends on the amount and on whether a trustee is named in the will. Larger amounts must generally be paid into court unless a trustee is named in a will or trust or a guardian of property has been appointed.
Can a trustee be held responsible for losses?
A trustee must invest as a prudent investor would. The court may relieve a trustee from personal liability for a breach of trust if they acted honestly and reasonably and ought fairly to be excused.
Sources
- Income Tax Act s. 104 (Justice Laws) — Justice Laws (federal)
- CRA – Graduated Rate Taxation of Trusts and Estates — canada.ca
- Trustee Act, R.S.O. 1990, c. T.23 (e-Laws) — Ontario e-Laws
- Ontario.ca – Guardianship of a child's money and property — ontario.ca
- Ontario.ca – Paying money into, and out of, court — ontario.ca
- Trustee Act, R.S.O. 1990, c. T.23 (CanLII) — canlii.org
- Court of Appeal for Ontario – Wall v. Shaw, 2018 ONCA 929 — ontariocourts.ca
- Ontario.ca – Administering estates — ontario.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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