Trust for Minors in a Will (Testamentary Trust for Minors)

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A trust for minors in a will (a testamentary trust for minors) is a legal arrangement created within a will that takes effect upon the death of the person who made the will (the testator) that protects and manages a child's inheritance (or grandchild's inheritance) until they are old enough to manage it themselves (as determined by the testator).

There A testamentary trust for minors is a legal arrangement created within a will that takes effect upon the death of the person who made the will. Its primary value lies in its ability to protect and manage assets for minor children who are legally unable to inherit and manage property on their own. Here's a breakdown of the key values and benefits of a testamentary trust for minors:

A. Protection of Assets

  • Avoids the Public Trustee: Without a testamentary trust, an inheritance for a minor may be managed by a government-appointed Public Trustee. The Public Trustee typically has strict rules about how the funds can be invested and when they can be distributed, often releasing the entire inheritance as a lump sum when the child reaches the age of majority (18 years of age in Alberta).

  • Protects against Creditors: Assets held within the trust are separate from the beneficiary's personal assets. This can protect the inheritance from being seized by the child's creditors or from a spouse in the event of a divorce.

  • Prevents Squandering: It prevents a young person from receiving a large lump sum of money before they are mature enough to manage it responsibly.

B.. Control and Flexibility

  • Appointing a Trustee: A testamentary trust allows you to appoint a person you trust (a trustee) to manage the assets for your child's benefit. This trustee can be a family member, a friend, or a professional trust company.

  • Staggered Distributions: You can specify in the will that the child will receive their inheritance in stages at specific ages (e.g., 25% at age 21, the remainder at age 25). This helps ensure the money is not spent irresponsibly all at once.

  • Discretionary Spending: The trustee can be given the power to make discretionary payments for the child's needs, such as education, healthcare, or living expenses, even before the child reaches the age of distribution specified in the trust.

C. Taxation and the Importance of Appropriate Structuring

  • Reference Point - Standard Taxation of Testamentary Trusts: Most testamentary trusts are taxed at the top marginal tax rate for all income earned within the trust, with a couple of important exceptions.

  • Exception - Graduated Rate Estate (GRE): An estate can be designated as a "Graduated Rate Estate" (GRE) for the first 36 months after the individual's death. During this period, the estate, which is a form of testamentary trust, is taxed at the graduated personal tax rates. This allows for some tax planning during the initial administration of the estate.

  • Exception - Qualified Disability Trust (QDT): If a testamentary trust is set up for a beneficiary who is eligible for the federal disability tax credit, it may qualify as a "Qualified Disability Trust" (QDT). A QDT is an exception and continues to be taxed at the graduated personal tax rates.

  • Exception - Income Distribution to the Beneficiary: This is a crucial point for minors. The trustee has the discretion to distribute income from the trust to the minor. When income is distributed or made "payable" to the beneficiary in a given year, that income is generally taxed in the hands of the beneficiary at their personal marginal tax rate, not at the trust's top rate. This is a key strategy for minimizing tax on trust income, as minors often have little to no other income and are in a very low tax bracket.

    • "Paid or payable": The trust income doesn't have to be physically handed over to the minor. If the trustee uses the funds for the minor's benefit (e.g., to pay for education, living expenses, or medical bills), this is often considered "paid or payable" and can be taxed in the minor's hands.

    • Attribution Rules: Unlike an inter vivos trust, the attribution rules generally don't apply to a testamentary trust. This means the income won't be attributed back to the deceased parent's estate for tax purposes.

  • The "21-Year Rule": A trust is generally subject to a "deemed disposition" rule every 21 years. This means that after 21 years, the trust is deemed to have sold its capital property at fair market value and immediately reacquired it. This can trigger a significant capital gains tax liability. Trustees often plan to distribute the capital to the beneficiaries before this 21-year anniversary to avoid this tax hit./span>

Contact our law firm today to learn how our legal team can help you plan for the future or deal with the legal demands associated with the passing of a loved one. Contact our law firm at 403-400-4092 or via email at Chris@NeufeldLegal.com to schedule a confidential initial consultation.

Henson Trusts. A Henson Trust is a trust (most frequently forming part of a parent's or grandparent's Will) that provides the trustees with the absolute discretion to distribute income and capital from the trust to the beneficiary as they see fit. The trustees have full control as to when, if and how much income or capital is to be paid to the beneficiary. Read more.

 

Inter Vivos Trusts. An inter vivos trust (also known as a living trust) is a legal arrangement created and funded during the lifetime of the settlor (the person creating the trust). The term "inter vivos" comes from the Latin "between the living" and as such is distinguishable from a testamentary trust, which is established on the death of the settlor. Read more.

 

Testamentary Trusts. A testamentary trust is a trust that is created by a person's will and comes into effect only upon their death. It is an alternative to distributing all assets directly to beneficiaries. Instead, assets are transferred to the trust, which is then managed by a trustee for the benefit of the designated beneficiaries. Read more.

 

Trust for Minors in a Will. A trust for minors in a will (a testamentary trust for minors) is a legal arrangement created within a will that takes effect upon the death of the person who made the will (the testator) that protects and manages a child's inheritance (or grandchild's inheritance) until they are old enough to manage it themselves (as determined by the testator). Read more.

 

Irrevocable Trusts. An irrevocable trust is a legal arrangement where the creator of the trust (known as the grantor or settlor) permanently transfers assets into the trust, giving up all ownership and control over those assets. Once established, an irrevocable trust generally cannot be changed, amended, or revoked without the consent of all beneficiaries, and sometimes a court order. Read more.

 

Asset Protection Trusts. An Asset Protection Trust is a legal arrangement designed to safeguard an individual's assets from potential future claims by creditors, lawsuits, or judgments. The core principle behind an asset protection trust is to legally separate ownership of assets from the individual who created the trust, making those assets less accessible to outside parties. Read more.

 


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