Will - Establishment of a Testamentary Trust
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A testamentary trust is a powerful estate planning tool established through a person's Last Will and Testament, coming into existence only upon their death. Unlike an inter vivos trust, which operates during the settlor’s lifetime, this arrangement allows the testator to maintain full control over their assets until passing. Under the Wills and Succession Act (Alberta), the will must clearly outline the intention to create the trust, the specific property to be held, and the designated beneficiaries. By using a testamentary trust, an Albertan can ensure that their legacy is managed according to their specific values rather than being distributed in a single lump sum. This structure is particularly common when dealing with complex family dynamics or significant wealth that requires professional oversight.
One of the primary motivations for establishing such a trust is the protection of minor children or young adult beneficiaries. Without a trust, any inheritance over $25,000 destined for a minor must typically be paid to the Office of the Public Guardian and Trustee, which limits flexibility. By creating a testamentary trust, parents can appoint a trusted individual to manage funds for a child’s education, maintenance, and advancement until they reach a more mature age, such as 25 or 30. This prevents a situation where an eighteen-year-old receives a significant windfall without the financial literacy to manage it. Furthermore, the trustee can be granted encroachment powers, allowing them to dip into the capital for emergencies or specific milestones like a first home purchase.
Another critical consideration involves the protection of vulnerable or disabled beneficiaries through what is often called a Henson Trust. Individuals receiving Assured Income for the Severely Handicapped (AISH) may lose their government benefits if they inherit assets directly that exceed certain limits. A properly drafted testamentary trust allows the trustee absolute discretion over distributions, meaning the assets are not considered the beneficiary’s personal property for benefit eligibility. This ensures the loved one enjoys a higher quality of life without sacrificing essential provincial government support. Failing to structure this correctly can lead to the unintended consequence of the inheritance simply replacing government funding rather than supplementing it.
The selection of a Trustee is perhaps the most significant concern, as this individual or entity bears a heavy fiduciary duty under the Trustee Act (Alberta). The trustee is responsible for investing the assets prudently, filing annual tax returns, and communicating transparently with beneficiaries. Many testators struggle with choosing between a family member, who understands the family's heart, and a professional trust company, which offers expertise and impartiality. If a family member is chosen, they must be someone with the temperament to handle potential conflicts and the diligence to keep meticulous records. It is often wise to name a successor trustee or a co-trustee to ensure the trust remains functional for its intended duration.
Taxation is a complex hurdle that continues to evolve significantly. Most testamentary trusts are now taxed at the highest marginal tax rate, rather than the graduated rates they once enjoyed. This means that income retained within the trust is taxed heavily, often making it more efficient to distribute income to beneficiaries in lower tax brackets. However, Graduated Rate Estates provide a 36-month window of tax flexibility that executors must navigate carefully (more on graduated rate estates). In turn, it is important understand and assess the administrative costs and high tax implications against the non-tax benefits of asset protection and controlled distribution involved with testatmentary trusts.
Furthermore, a testator must be wary of potential litigation and family maintenance claims that could jeopardize the trust’s integrity. The Family Property Act (Alberta) and provisions for "dependants' relief" allow certain family members to challenge a will if they feel they haven't been adequately provided for. If a testamentary trust is seen as a way to unfairly disinherit a spouse or a dependent child, the courts may intervene and vary the terms of the trust.
Our law firm can help you plan for the future, including the preparation of a well-drafted will and other estate planning documents, as well as dealing with the legal demands associated with the passing of a loved one. We welcome you to contact our law firm today at 403-400-4092 or via email at Chris@NeufeldLegal.com to schedule a confidential initial consultation.
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