- A testamentary trust is one that arises on and as a consequence of a person's death, while any other trust is an inter vivos (living) trust for tax purposes.
- In Alberta, the trustee of a trust created by will is governed by the Trustee Act, but the will itself generally prevails over the Act's default rules.
- Tax treatment varies by trust type, so the kind of testamentary trust matters as much as the fact that it is one.
You may have been told that a trust will be created when someone dies, perhaps because you are a named beneficiary or a named trustee. The word can sound technical, but the idea is simple: property is held by one person for the benefit of others, under rules set out in a document.
This article explains what makes a trust testamentary, when it begins, who runs it, and how it compares with a trust set up during someone's lifetime. It is general information, not advice on your own situation.
This article covers the law of Alberta.
What makes a trust testamentary
Federal tax law defines a testamentary trust as a trust that arose on and as a consequence of the death of an individual. An inter vivos trust is any trust that is not a testamentary trust.
The Canada Revenue Agency describes the same idea: a trust generally created on and as a result of a person's death, such as under a will or court order. A trust created by a living person is generally excluded, and an inter vivos trust is one set up during the settlor's lifetime.
A settlor is the person who creates the trust. For a trust created by will, Alberta's Trustee Act says the settlor includes the testator, meaning the person who made the will.
When it starts and who runs it
In plain terms, a testamentary trust comes into being because of the death, not before it. The tax definition, arising on and as a consequence of death, is the main official test for it. How and when a particular trust is actually set up and funded depends on the wording of the will and on how the estate is administered, so that is worth confirming for your own file.
If there is a will, a grant of probate asks the Court of King's Bench to confirm the named executor's authority. The executor deals with the estate, and the person named as trustee holds and manages the trust property afterward. These can be the same person or different people.
The trustee works under Alberta's Trustee Act, SA 2022, c T-8.1, which replaced the former Trustee Act and came into force on February 1, 2023. The Act applies to trusts created before, on or after the date its section 2 came into force.
The will usually sets the trust's terms. The trust instrument prevails over a contrary provision of the Trustee Act unless the Act provides otherwise, and some rules cannot be overridden.
Testamentary trust versus living trust
| Point | Testamentary trust | Inter vivos (living) trust |
|---|---|---|
| How it arises | On and as a consequence of death | Set up during the settlor's lifetime |
| Tax definition | Arises because of a death | Any trust that is not testamentary |
| Deemed disposition of capital property | Spousal trust: on the spouse's death. Other trusts: 21 years after creation | Same rules apply, depending on trust type |
| Tax rate | Highest individual rate, unless a graduated rate estate or qualified disability trust | Highest individual rate |
There is an exception to the label itself. A testamentary trust can be treated as an inter vivos trust for tax purposes if it incurs certain debts owed to non-arm's-length parties, although some debts are excluded.
Tax points to know
- A graduated rate estate is taxed at graduated individual rates for up to 36 months after death.
- A qualified disability trust is a testamentary trust, elected on Form T3QDT, whose electing beneficiary qualifies for the disability tax credit.
- A T3 return is due no later than 90 days after the trust's tax year-end, and any balance owing is due in the same 90 days.
- A trust may deduct income that became payable to a beneficiary in the year, and the beneficiary includes that amount in income.
A spousal trust rollover can defer tax on property passing on death to a spouse, common-law partner or a will-created trust. The spouse must be entitled to all trust income arising before their death, and no one else may receive or use the trust's income or capital before then. The property must also be shown to have vested indefeasibly within 36 months after death, or a longer period the Minister considers reasonable on written request, and the spouse or trust must be resident in Canada.
What to do next
- Get a copy of the will and read the trust terms, including who the trustee is and who the beneficiaries are.
- Ask how and when the trust will be set up and funded, since that depends on the will and on how the estate is being administered, and a lawyer can confirm the steps for your situation.
- Ask an accountant about T3 filing and which tax treatment applies to this particular trust.
- Speak with a lawyer if the terms are unclear or family members disagree about how the trust should work.
Frequently asked questions
Is a testamentary trust the same as a living trust?
No. A testamentary trust arises on and because of a death, while a living trust is set up during the settlor's lifetime. Tax treatment can differ between them.
Does a testamentary trust always have special tax rates?
No. A trust other than a graduated rate estate or qualified disability trust pays tax at the highest individual percentage on its taxable amount. Lower graduated rates apply only to those two types.
Which Alberta law governs the trustee?
The Trustee Act, SA 2022, c T-8.1, which came into force on February 1, 2023. The will's terms generally prevail over its default rules unless the Act provides otherwise.
Can a testamentary trust be taxed as a living trust?
Sometimes. It can be treated as an inter vivos trust for tax purposes if it incurs certain debts owed to non-arm's-length parties, though some debts are excluded. An accountant can confirm whether this applies.
Sources
- Income Tax Act, s. 108(1) (Justice Laws) — Justice Laws (federal)
- CRA – Trust types and codes — canada.ca
- CRA – When to file a trust's T3 return — canada.ca
- Trustee Act, SA 2022, c T-8.1, ss. 1(p), 2 (King's Printer) — kings-printer.alberta.ca
- Alberta.ca – Deceased persons' estates — alberta.ca
- Income Tax Act, s. 70(6) — Justice Laws (federal)
- Income Tax Act, s. 104(4) — Justice Laws (federal)
- Income Tax Act, s. 122(1); CRA trust types — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a wills & estates question
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