Testamentary Trusts in Ontario: How They Work in a Will

When most people hear "trust," they picture wealthy families and complicated legal structures. In reality, a testamentary trust is simply a trust created inside your will that springs into existence when you die. It is one of the most versatile and widely used tools in Ontario estate planning — and it is not just for the wealthy.

A testamentary trust lets you control how and when your assets reach your beneficiaries, protect an inheritance from a beneficiary's creditors or divorce, and — depending on structure — achieve real tax savings. This article explains how they work, when they make sense, and what you need to know before including one in your will.

What Is a Testamentary Trust?

A testamentary trust is a legal arrangement created by the terms of a will. It does not exist during your lifetime — it is created at the moment of your death, funded with assets from your estate, and managed by a trustee you name in the will.

Once created, the trust:

• Holds assets on behalf of one or more beneficiaries
• Is managed by a trustee (a person or trust company you appoint)
• Operates according to the terms of your will until the trust ends (for example, when a child reaches a specified age)
• Files its own annual tax return as a separate taxpayer under the Income Tax Act

This last point — separate taxpayer status — was historically a significant tax advantage, though federal rule changes have reduced it for most trusts. The exception is the Graduated Rate Estate (GRE) and the Qualified Disability Trust (QDT), which can still access graduated tax rates. A tax professional can help you understand the current rules, which you should verify with CRA.

Common Reasons to Use a Testamentary Trust

Protecting Young Beneficiaries

If a beneficiary is a minor, they cannot legally receive assets directly. Without a trust, the Public Guardian and Trustee steps in and manages the funds under provincial rules until the child turns 18 — at which point they receive everything in one lump sum. A testamentary trust lets you hold assets for a child until a more mature age (say, 25 or 30), releasing funds in stages if you prefer.

Beneficiaries Who Are Not Great With Money

A testamentary trust can provide structured distributions — say, monthly income — rather than a lump sum. This protects a beneficiary who struggles with spending, addiction, or financial judgment without disinheriting them.

Protecting Against Creditors and Divorce

A beneficiary who is in financial trouble or in a troubled marriage may have inheritance at risk. Assets held in trust are generally not the beneficiary's property, which can offer some protection in creditor and family law proceedings. The protection is not absolute — speak with a lawyer about the specifics.

Beneficiaries With Disabilities

A properly structured testamentary trust can protect a disabled beneficiary's eligibility for government benefits like ODSP. This type — an absolute discretion trust — is often called a Henson trust in Ontario and is the subject of a separate article.

Spousal Trusts

A testamentary spousal trust holds assets for a surviving spouse, with specific tax rules that may allow assets to be transferred to the trust on a tax-deferred basis. Assets typically flow to the next generation after the spouse dies. These are covered in a dedicated article.

How a Testamentary Trust Is Structured in a Will

Your will creates the trust by specifying:

1. Who the trustee is — and who acts as successor trustee if the first trustee can't serve
2. Who the beneficiaries are — with clear language identifying them
3. What assets fund the trust — all residue, a specific share, or named assets
4. What powers the trustee has — investment powers, ability to encroach on capital, discretion over distributions
5. When and how the trust ends — age of distribution, death of a beneficiary, etc.

Clear drafting is essential. Ambiguity in trust terms leads to disputes and court applications. This is one reason having an estate lawyer draft your will matters — especially when a trust is involved.

The Trustee's Role and Responsibilities

The trustee of a testamentary trust holds a position of great responsibility. Under Ontario's Trustee Act and the common law, a trustee must:

• Act in the best interests of all beneficiaries (both current income beneficiaries and those who receive the remainder)
• Invest prudently — the prudent investor standard applies
• Keep trust assets separate from personal assets
• Maintain records and account to beneficiaries
• File annual trust income tax returns
• Act impartially — not favour one beneficiary over another without clear authority from the trust document

Trustees can be compensated — Ontario law allows "fair and reasonable" compensation unless the will specifies otherwise. Acting as a trustee is real work and carries real legal duties.

Tax Considerations

As of writing, most testamentary trusts are taxed at the highest marginal rate after the estate's first 36 months. The GRE, which is the estate itself in its first 36 months, benefits from graduated rates. The QDT can also access graduated rates if the eligibility conditions are met. Verify these rules with CRA and work with a tax professional for income-splitting strategies.

In some cases, income earned inside the trust can be taxed in the hands of the beneficiary — but attribution rules and the "kiddie tax" rules can limit this for minor children. Tax law in this area is detailed and subject to change.

Frequently asked questions