When a person with wealth dies and leaves it directly to their beneficiaries, simplicity is achieved at a cost. The beneficiary who receives a large sum may be too young to manage it wisely. A beneficiary with a disability may lose access to government support programs as a result of the inheritance. A beneficiary going through a divorce may see the inheritance flow directly into the division of family property. A testamentary trust solves each of these problems — and others — by controlling how and when an inheritance is received.
What Is a Testamentary Trust?
A testamentary trust is a trust created by a will, taking effect upon the testator’s death. Unlike an inter vivos trust (created during the testator’s lifetime), a testamentary trust does not exist — and holds no assets — until after the testator dies. At that point, the estate trustee transfers the specified assets into the trust, and the trustee (who may be the same or a different person) manages them in accordance with the trust terms.
Testamentary trusts are extraordinarily flexible. They can hold any type of asset, last for any duration, benefit one or multiple beneficiaries, and be structured with virtually any combination of conditions, restrictions, and powers that the testator chooses to include.
The Henson Trust: Planning for a Beneficiary With a Disability
The Henson trust — named after an Ontario court case — is a specific type of testamentary trust designed for beneficiaries who receive government disability support, particularly Ontario Disability Support Program (ODSP) benefits.
ODSP has asset limits: a recipient with assets above a certain threshold may lose their eligibility for support payments. A straightforward inheritance, even a modest one, can disqualify a beneficiary from ODSP and leave them worse off overall.
A Henson trust is fully discretionary — meaning the trustee has absolute discretion to distribute (or not distribute) income and capital to the beneficiary. The trust assets do not belong to the beneficiary; they belong to the trust. Because the beneficiary has no legal right to demand distributions, the ODSP regulations generally do not treat the trust assets as the beneficiary’s ‘property’ for eligibility purposes.
The result is that a beneficiary with a disability can receive the benefits of the inheritance — through trustee discretion — while maintaining their eligibility for government support. This is one of the most important estate planning tools available for families with a disabled member.
Trusts for Minor Children
Children under 18 cannot legally hold significant property in their own names — any property above a nominal amount must be administered by the Public Guardian and Trustee or a court-appointed guardian unless a trust is in place. Leaving an inheritance directly to a minor child effectively means the government manages it.
A testamentary trust for a minor child solves this by appointing a trustee — usually a parent, grandparent, or trusted adult — to hold and manage the inheritance until the child reaches a specified age. The trust can provide for the child’s education, health, and welfare during the trust period, and distribute capital at whatever age or milestone the testator chooses.
Distributing at age 18 is rarely wise. Many estates lawyers recommend staged distributions — for example, one-third at 21, one-third at 25, and the remainder at 30 — to allow young beneficiaries to develop financial maturity gradually rather than receiving everything at once.
Spousal Trusts
A testamentary spousal trust allows a testator to benefit their surviving spouse during the spouse’s lifetime while preserving the capital for children or other beneficiaries after the spouse’s death. This structure is particularly valuable in blended family situations where the testator wants to provide for the current spouse without disinheriting children from a prior relationship.
A qualifying spousal trust under the Income Tax Act also permits assets to roll into the trust on a tax-deferred basis on the testator’s death, rather than triggering immediate capital gains. The tax deferral continues until the trust disposes of the assets or the spouse dies.
The Tax Advantage of Testamentary Trusts
For estates created before 2016, testamentary trusts were taxed at graduated rates — the same marginal rates as individuals. Federal tax changes in 2016 changed this: most testamentary trusts are now taxed at the top marginal rate. However, two exceptions remain important:
- Graduated Rate Estates (GREs): For the first 36 months following a testator’s death, the estate qualifies as a GRE and is taxed at graduated rates, creating significant planning opportunity for income earned by the estate in the first three years
- Qualified Disability Trusts (QDTs): A trust for a beneficiary who qualifies for the disability tax credit may still benefit from graduated rates, providing ongoing tax savings for disabled beneficiaries
The interaction of testamentary trust law and tax planning requires careful coordination between your estate lawyer and your tax advisor.
Who Should Serve as Trustee?
The trustee of a testamentary trust has fiduciary duties to administer the trust in the beneficiaries’ best interests, invest prudently, account for trust activities, and follow the trust terms. This is a significant responsibility, particularly for long-duration trusts.
Choosing the right trustee — and naming successors — is as important as designing the trust itself. Consider whether the trustee has the financial knowledge, personal bandwidth, and interpersonal skills to manage the trust effectively over time, particularly if beneficiary relationships may be complex.
Final Thoughts
Testamentary trusts add complexity to a will — but for families with minors, disabled beneficiaries, blended family dynamics, or significant assets, that complexity is purposeful. A well-designed testamentary trust does not just distribute wealth; it protects it, manages it, and ensures it serves the people and purposes you most care about. An experienced wills and estates lawyer can help you determine whether a testamentary trust belongs in your estate plan and, if so, how to structure it.
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Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified Ontario lawyer.
This article is provided for general information only and does not constitute legal advice. For advice about your specific situation, please contact Goldstone Law PC directly.