What Is a Testamentary Trust in a Manitoba Estate?

If you have been told that a parent's estate will be held in a testamentary trust, you may be wondering what that means for you, when you will receive anything and who is in charge in the meantime.

This article explains the idea in plain terms and points out where Manitoba rules can affect a trust. The details of any particular trust come from the will itself, so a lawyer should review the document before you make decisions.

This article covers the law of Manitoba.

What a testamentary trust is

A trust is an arrangement in which one person, the trustee, holds and manages property for the benefit of others, called beneficiaries. A testamentary trust is one created by a will. Instead of leaving property to a beneficiary outright, the will directs the executor to hand it to a trustee to hold on stated terms.

People often use these trusts for children or grandchildren who are young, for a beneficiary who may have difficulty managing money, or to keep property in the family for a period. The terms are whatever the will says, such as when payments are made, for what purposes and when the trust ends.

When it starts and who controls it

A testamentary trust does not exist while the person is alive. It begins only on death, after the will takes effect. In practice the executor first deals with the estate: collecting assets, paying debts and, where required, giving notices. Only then is the remaining property placed in the trust.

The trustee named in the will controls the trust property and must follow the will. Sometimes the executor and the trustee are the same person, and sometimes they are different. The will may also name a replacement if the first choice cannot act.

If no one suitable is available, the court may involve the Public Guardian and Trustee. It describes itself as an administrator of last resort, acting only when no one else is willing, capable and appropriate. When it acts, it has the powers and duties of a trustee under The Trustee Act, but it is not required to accept an appointment just because it has the power to.

How it differs from a trust made during life

Because a testamentary trust comes from the will, it can be challenged or affected by the same issues that affect the will. If the will changes or is found invalid, the trust may change with it. A trust made during life has its own document and its own rules.

Issues that can affect a trust

• Debts come first. Estate assets must cover debts before will beneficiaries inherit, and paying debts is one of the administrator's tasks.
• Creditors. A personal representative who publishes the required notice in The Manitoba Gazette and a local newspaper may distribute after the notice period and is not liable for claims they did not know of. This does not apply to heirs, next of kin or legatees claiming as such, and creditors can still follow estate proceeds.
• A surviving spouse or common-law partner. An equalization payment under The Family Property Act is a debt of the deceased that ranks ahead of will gifts. It is paid from the interests of beneficiaries other than the survivor in proportion to value, unless the will says otherwise. A survivor can also choose to take what the will gives instead.
• Income assistance. A beneficiary's interest in a discretionary trust is not a financial resource for Employment and Income Assistance unless funds are actually distributed. Whether a trust is discretionary depends on the trustee's discretion and requires a review of the trust document. For a non-discretionary trust, adult beneficiaries are expected to pursue all reasonable steps to access the funds, which count as a non-exempt resource unless within the liquid asset exemption.

Payments from a trust are generally treated as unearned income unless an exclusion applies, and trustees must give the program the information needed to decide eligibility. If a beneficiary receives assistance, ask a lawyer how the trust wording will be read.

What to do next

• Ask the executor for a copy of the will and read the trust clauses.
• Find out who the trustee is and who the replacement trustee is.
• Note when and why payments may be made, and when the trust ends.
• If a beneficiary receives income assistance, raise this early with a lawyer.
• Keep records of every payment the trustee makes.

Tax treatment of trust income is a separate question, and an accountant can explain how it applies to your situation.

Frequently asked questions