Testamentary Trusts in an Ontario Will: When and How to Use One

A testamentary trust Ontario will can be one of the most powerful estate-planning tools available — yet most people have never heard the term. If you have young children, a family member on disability benefits, or a loved one who struggles with money, a testamentary trust may be exactly what your will is missing.

This guide explains how testamentary trusts work in Ontario, who they protect, and what to think through before asking a lawyer to draft one.

What Is a Testamentary Trust?

A trust is a legal arrangement in which one person (the trustee) holds assets on behalf of another person (the beneficiary). When a trust is created inside a will and only comes into existence at the moment of the testator's death, it is called a testamentary trust.

That single timing difference sets testamentary trusts apart from inter vivos trusts (also called living trusts), which are created and funded while the person is still alive. A testamentary trust has no legal existence until the will is admitted to probate and the estate is administered. At that point, the trustee takes control of the portion of the estate set aside for the trust and manages it according to the instructions you wrote into your will.

The Key Parties

Every testamentary trust involves three roles:

• Settlor / Testator — the person who creates the trust through their will. You are the settlor of any trust you include in your own will.
• Trustee — the person or corporate entity you appoint to manage the trust assets and carry out your instructions.
• Beneficiary — the person (or people) who benefit from the trust. The trustee holds assets for the beneficiary, not for themselves.

The same person can sometimes wear more than one hat — for example, an adult child might be both a trustee and one of several beneficiaries. However, a trustee cannot be the sole beneficiary of the same trust; that collapses the trust relationship.

Common Reasons to Include a Testamentary Trust in Your Will

Protecting Minor Children

Ontario law does not allow a minor (anyone under 18) to receive an inheritance directly. If you leave money outright to a child under 18, the funds go to the Office of the Children's Lawyer until the child turns 18 — at which point the entire sum is handed over in one lump payment, whether or not the child is ready to manage it.

A testamentary trust solves both problems. The trustee holds and manages the money, using it for the child's education, health, and general welfare during childhood. Your will can then specify the age at which the child receives full control — many parents choose 21, 25, or even a staged distribution (one-third at 21, one-third at 25, the balance at 30).

Protecting an Adult Child or Other Beneficiary

Not every beneficiary is a minor. Some adult children face challenges — addiction, chronic debt, a difficult divorce, or simply poor financial habits — that make a direct lump-sum inheritance a genuine risk. A testamentary trust lets you leave assets for their long-term benefit while placing a responsible trustee in charge of distributions.

Protecting a Surviving Spouse in a Blended Family

In blended-family situations, a spousal trust lets your surviving spouse receive income and support during their lifetime while ensuring that whatever remains passes to your children from a prior relationship. This balances care for your spouse with fairness to your children.

Protecting a Person with a Disability — The Henson Trust

If a beneficiary receives Ontario Disability Support Program (ODSP) benefits or similar means-tested support, a direct inheritance can disqualify them from those benefits once the inheritance exceeds the program's asset limit (as of writing — verify the current amount with a lawyer or the relevant government program).

A Henson trust is a fully discretionary testamentary trust designed to sidestep this problem. Because the trustee has absolute discretion over whether to make any distribution at all, the beneficiary has no legal right to demand payment — meaning the trust assets are generally not counted as the beneficiary's property for ODSP purposes. This concept has been affirmed by Ontario courts and is widely used in disability estate planning. Drafting a Henson trust requires care; the language must be precisely discretionary to achieve the intended effect.

How Testamentary Trusts Work: Key Features

Trustee Duties and Powers

Ontario trustees are governed in part by the Trustee Act. Unless your will expands or restricts their authority, trustees must act in the best interests of the beneficiary, invest prudently (the "prudent investor" standard), keep trust assets separate from their own, account for all transactions, and avoid conflicts of interest.

Your will should spell out any additional investment powers you want the trustee to have — for example, the power to hold a family cottage rather than immediately selling it.

Mandatory vs. Discretionary Distributions

Your will can require the trustee to pay out a fixed amount or percentage at set intervals (mandatory distributions), give the trustee full discretion over if and when to pay (fully discretionary), or set a middle path — mandatory income payments with discretionary access to capital.

Fully discretionary trusts offer maximum flexibility and are essential for ODSP-related planning. Mandatory distributions are simpler to administer and may suit straightforward child trusts.

When Does the Trust End?

Your will should state clearly when the trust terminates. Common triggers include: the beneficiary reaching a specified age, the beneficiary's death, or all trust assets being fully distributed. On termination, any remaining assets pass to whoever you have named as the "remainder beneficiary" — often the beneficiary themselves, their estate, or other family members.

Drafting Considerations

A few points that your lawyer should address when drafting a testamentary trust:

• Name a backup trustee. Your primary trustee may predecease you, become incapacitated, or simply decline the role. Naming at least one alternate avoids a court application.
• Trustee compensation. Ontario law entitles trustees to reasonable compensation from the trust estate. Your will can fix a specific fee or leave it to the statutory default. Be transparent so your trustee knows what to expect.
• Investment powers. The default prudent-investor standard may be too restrictive if you want the trustee to hold a family business, real estate, or other non-standard assets. Explicitly grant those powers in the will.
• Multiple beneficiaries. If one trust serves several beneficiaries (for example, three children), consider how capital is shared and what happens when one child's trust share ends.

Tax Treatment of Testamentary Trusts

Federal tax changes in 2016 removed the graduated-rate advantage that testamentary trusts once enjoyed. Today, most testamentary trusts pay tax at the top marginal rate.

Two exceptions remain worth knowing about. A Qualified Disability Trust (QDT) — a testamentary trust for a disabled beneficiary who jointly elects with the trustee — may still access graduated rates. An Estate is also taxed at graduated rates for its first 36 months. Your lawyer and accountant should review the tax implications of any trust you are considering.

Frequently asked questions