Spousal Trusts in Ontario Wills: Protecting Your Surviving Spouse

When one spouse dies, the other typically needs financial security — ideally for the rest of their life. At the same time, many couples also want to ensure that what remains when the surviving spouse dies flows to their chosen heirs, not to someone else's. A spousal trust built into your will can accomplish both goals at once.

This type of testamentary trust is especially common in blended families, where one or both spouses have children from earlier relationships. But it is useful in any estate where the testator wants to balance a spouse's lifetime income with the eventual transfer of assets to the next generation.

What Is a Spousal Trust?

A testamentary spousal trust is a trust created in your will that takes effect at your death. It holds some or all of your assets for the benefit of your surviving spouse during their lifetime. When the surviving spouse dies, the remaining assets — the remainder — pass to whoever you have named in your will (often your children).

The trust is funded from your estate. The surviving spouse is typically the income beneficiary: they receive the income the trust generates (investment income, rental income, etc.) and may also receive capital if the trustee has the power to "encroach on capital" for their care.

Key Features

• Lifetime security: the spouse has a guaranteed stream of income and, if needed, access to capital
• Protection of the remainder: your children (or other heirs) are guaranteed to receive what is left after the spouse dies
• Tax-deferred rollover: under the Income Tax Act, assets can generally be transferred into a qualifying spousal trust on a tax-deferred basis — the deemed disposition at death is deferred until the trust disposes of the assets or the spouse dies

The Tax-Deferred Transfer Rule

This is one of the most important financial features of a spousal trust. When you die, the general rule is that you are deemed to have disposed of all your capital property at fair market value — triggering capital gains tax in your final return. However, the Income Tax Act allows capital property to transfer to a qualifying spousal trust on a rollover basis, meaning no capital gains are triggered at the time of transfer.

The gain is deferred until the trust sells the asset or the surviving spouse dies, at which point the trust is deemed to have disposed of its assets. Verify how these rules work with CRA and a tax professional, as the Income Tax Act conditions for a qualifying spousal trust are specific (for example, the spouse must be the only person who can benefit from the trust income while they are alive).

When a Spousal Trust Is Especially Useful

Blended Families

If you and your spouse each have children from prior relationships, a spousal trust is often the preferred solution. Leaving everything outright to your surviving spouse means your children may receive nothing if the spouse remarries, is influenced by others, or simply chooses to change their own will. A spousal trust locks in who gets the remainder.

Protecting Against Future Relationships

Even in a first marriage, there is no guarantee the surviving spouse will not remarry and redirect the estate. A spousal trust ensures your assets eventually flow to your intended heirs, not a future partner or that partner's family.

Protecting a Spouse Who Is Not Financially Experienced

Some surviving spouses are unused to managing investments or large sums. A trust with a professional or knowledgeable trustee takes on investment management, reducing the risk of the estate eroding through poor decisions.

Minimizing Estate Administration Tax on Second Death

If assets are held in trust rather than in the surviving spouse's personal estate, those assets may not be subject to estate administration tax (probate fees) on the second death. Verify the current approach with your estate lawyer.

The Trustee's Role in a Spousal Trust

The trustee — which could be the surviving spouse themselves, a family member, or a professional — manages the trust assets. If the spouse is the sole trustee, there are important limits: the trustee-spouse should not have a general power to add beneficiaries or to shift capital to themselves beyond what the will authorizes, or the trust may lose its qualifying status for tax purposes.

Common trustee structures:

• A third party (adult child, sibling, professional) acts as trustee — cleanest for tax purposes
• The surviving spouse and another person act as co-trustees
• The spouse acts as sole trustee with restricted powers — feasible but requires careful drafting

Drafting Considerations

For a spousal trust to work as intended, the will must be carefully drafted. Key provisions include:

• Income distribution: must the trustee pay all income to the spouse each year, or can they accumulate it?
• Encroachment on capital: can the trustee use capital for the spouse's health, maintenance, or comfort?
• Trustee powers: full investment powers, ability to hold real estate, deal with the CRA, etc.
• Remainder clause: who receives the trust assets after the spouse dies, and in what shares?
• Vesting conditions: does the spousal trust only arise if the spouse survives you by a set period?

Mistakes in drafting — particularly around who can benefit while the spouse is alive — can jeopardize the favourable tax treatment.

Frequently asked questions