Testamentary Trusts

What is a Testamentary Trust?

A Testamentary Trust is a trust created through your will that is established for the benefit of your beneficiaries.

How can it be used?

  • To protect your beneficiaries’ inheritance from claims by present and future creditors and potentially marital or family property claims.
  • To ensure your wishes will be respected regarding the use or timing of the inheritance, especially where young children are concerned.
  • To provide continuity of ownership (i.e. cottages, small business corporations).
  •  To preserve the beneficiaries’ entitlement to government benefits. Who uses it?
  • Parents with children who are young, in a high-income tax bracket, or on disability benefits.
  •  Parents wanting to protect their children’s inheritance from creditors or spouses.
  •  Parents wanting to provide financial support to a surviving spouse for life, while ensuring that assets remain available to distribute to the children on the death of the surviving spouse.
  • Someone wanting to provide an income-splitting opportunity for their surviving spouse.

Case Study

Jay and Pamela are in their 70s and have a combined estate of $1 million. Their older son, Michael, is married with three teenage children, while the younger son, Chris, has been living in a common-law relationship for several years and has two young children. Jay and Pamela want to ensure that whatever inheritance they leave for their sons will not have to be shared with a spouse or partner if the relationship ends. They are also concerned about Michael’s difficulty managing his financial affairs.

Solution

Rather than leaving their sons outright gifts in their wills, Jay and Pamela establish testamentary trusts in their wills for each son’s share of the estate. By using a discretionary testamentary trust, they are able to better protect their children’s inherited assets in the event either one separates from their spouse. Michael’s inheritance is also protected from his own mismanagement by having a financial trustee oversee the use and distribution of the assets, helping to ensure there are assets for his lifetime and likely his children’s.

2 Assumes initial investment of $500,000, 5% rate of return (interest income) and marginal tax rate of 46.41%. Although this material has been compiled from sources believed to be reliable, we cannot guarantee its accuracy or completeness. All opinions expressed and data provided herein are subject to change without notice. The information is provided solely for informational and educational purposes and is not intended to provide, and should not be construed as providing individual financial, investment, tax, legal, or accounting advice. Professional advisors should be consulted prior to acting on the basis of the information contained herein.

Source: Assante Wealth Management Generations series, “Testamentary Trusts”. January 2010. Content provided
by the United Financial Wealth Planning Group.

Assante advisory services are offered through Assante Capital Management Ltd. and Assante Financial Management Ltd. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. Assante is an indirect, wholly-owned subsidiary of CI Financial Corp. (“CI”). The principal business of CI is the management, marketing, distribution and administration of mutual funds, segregated funds and other fee-earning investment products for Canadian investors through its wholly-owned subsidiary CI Investments Inc. Wealth planning services may be provided by an accredited Assante advisor or by the professionals of the Wealth Planning Group of United Financial, a division of CI Private Counsel LP.

© 2013 Assante Wealth Management. All rights reserved.