- A testamentary trust is one that arises on and as a result of a person's death, while an inter vivos (living) trust is any trust that is not.
- Alberta's Trustee Act sets the duties a trustee must follow, but the wording of the will generally prevails over the Act unless the Act says otherwise.
- Tax treatment differs by trust type, so a testamentary trust is not automatically taxed at low rates.
You may have been told that a will "creates a testamentary trust" and not been sure what that means. In plain terms, it means that instead of handing an inheritance straight to someone, the estate holds it and a trustee manages it for that person under rules set out in the will.
This article explains what a testamentary trust is, how it compares with a living trust, why families use one, and how it begins and ends in Alberta. It is general information, not advice on your own estate.
This article covers the law of Alberta.
What a testamentary trust is
Federal tax law defines a testamentary trust as a trust that arose on and as a consequence of the death of an individual. The CRA describes it as one generally created on and as a result of a person's death, such as under a will or court order.
There are three roles. The settlor is the person whose property funds the trust, and for a trust created by will under Alberta's Trustee Act, the settlor includes the testator. The trustee manages the property. The beneficiaries are the people, or sometimes the purposes, the trust is for.
How it differs from a living trust
An inter vivos trust is any trust that is not a testamentary trust. In practice it is a trust set up during the settlor's lifetime. A trust created by a living person is generally excluded from the testamentary category.
| Feature | Testamentary trust | Inter vivos (living) trust |
|---|---|---|
| When it arises | On and because of a death | During the settlor's lifetime |
| Usual source | A will or court order | A trust deed signed by a living person |
| Tax label | Testamentary | Any trust that is not testamentary |
There is an exception. 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.
When families use a testamentary trust
- Children or young beneficiaries. A trustee can pay income toward a minor's maintenance, education, benefit or advancement as the trustee considers reasonable.
- A surviving spouse or partner. Property passing to a will-created trust can qualify for a tax rollover if the spouse is entitled to all the trust income and no one else can receive or use income or capital before the spouse's death. The property must also be shown to have vested indefeasibly in the spouse or trust 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.
- A beneficiary with a disability. A qualified disability trust is a testamentary trust, elected on Form T3QDT, whose electing beneficiary qualifies for the disability tax credit.
- Control over timing. A trust can hold funds until a later age, since the Age of Majority Act definition of adult applies only if the instrument gives no definition and shows no contrary intention.
If no trustee is named for a minor's funds, they must generally be held by the Public Trustee, with some exceptions. Naming a trustee in the will avoids that default.
When it begins, how it runs and when it ends
The tax definition says a testamentary trust arises on and as a consequence of death. How and when the trust is funded depends on the will and the facts, so it is worth confirming with a lawyer. Alberta's current Trustee Act replaced the former Trustee Act and was proclaimed in force on February 1, 2023, and it applies to trusts created before, on or after the date its section 2 came into force.
Once it is running, the trustee must act in good faith and in line with the trust terms, the interests of the beneficiaries and the Trustee Act. The trustee must use the care, diligence and skill of a person of ordinary prudence, and a trustee with professional skill is held to a higher standard. The will generally prevails over a contrary provision of the Act, but some rules, such as s. 84, cannot be overridden.
How it ends depends on the wording. A minor's trust may continue beyond 18 depending on the will, and funds are paid out at 18 or at the age the trust document specifies. For a spousal trust, the deemed disposition of trust capital property at fair market value occurs on the spouse's death, while other trusts face a deemed disposition 21 years after creation.
How it is taxed
A trust other than a graduated rate estate or qualified disability trust pays tax at the highest individual percentage on its taxable amount. A graduated rate estate is taxed at graduated individual rates for up to 36 months after death. A trust may deduct income that became payable to a beneficiary in the year, and the beneficiary includes that amount in income.
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.
What to do next
- Read the trust wording in the will, including who the trustee is and when payments end.
- Ask whether the trust is meant to be a spousal trust, a minor's trust or a disability trust, since the tax rules differ.
- Keep records of income, expenses and payments from the start.
- Speak with a lawyer or accountant before the first T3 filing or before any large payment.
Frequently asked questions
Is a testamentary trust the same as a will?
No. A will is the document, and a testamentary trust is an arrangement the will can create. The trust arises on and as a result of death.
Is a testamentary trust taxed at low rates?
Not automatically. Apart from a graduated rate estate or qualified disability trust, a trust pays tax at the highest individual percentage.
Can a trustee also be a beneficiary?
It can be allowed if the will expressly permits it. Without that permission, the trustee cannot use the office to gain a personal benefit beyond what the law or the instrument permits. On application by a trustee or qualified beneficiary, the court may also permit an act that would otherwise breach the conflict rules, or excuse the trustee from liability, if that is in the best interests of the beneficiaries or purposes of the trust.
What happens if a trustee does a poor job?
A trustee or beneficiary can apply to the court to decide whether a duty was breached. The court may order performance or remove the trustee.
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
- Age of Majority Act, s. 3 — kings-printer.alberta.ca
- Alberta.ca – Assets of a minor — alberta.ca
- Income Tax Act, s. 70(6) — Justice Laws (federal)
- Income Tax Act, s. 104(4) — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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