The testamentary trust

What is a testamentary trust under civil law?

The testamentary trust makes it possible to create, at a person’s death, a separate patrimony intended to be administered for the benefit of other persons, generally the spouse, the children or loved ones whom one wishes to protect.

Under Québec law, the trust constitutes an autonomous and separate patrimony. The property transferred to it is no longer held directly by the beneficiaries, but is administered by one or more persons called trustees, in accordance with the instructions set out in the will.

The testamentary trust generally involves three parties:

• the settlor, that is, the person who creates the trust by will;
• the trustee, that is, the person or institution responsible for administering the property of the trust;
• the beneficiary, that is, the person who receives the benefits provided for by the trust.

The trust thus makes it possible to entrust the management of certain property to a trusted person while ensuring that this property benefits the beneficiaries according to the terms determined by the testator. For example, it can provide an income to a surviving spouse, protect a minor or vulnerable child, or provide a framework for the gradual transmission of a patrimony.

The testamentary trust takes effect only at the testator’s death. The terms of its administration, the powers and obligations of the trustees, the rights of the beneficiaries and the conditions for the distribution of the property are set out in the will. The testator can thus determine who will administer the property, who will benefit from it and on what terms, subject to the rules provided by law.

To protect the patrimony and the testator’s vulnerable heirs

For whom can the testamentary trust be useful? For anyone who wishes to protect their patrimony or see to the protection of a loved one. Contrary to popular belief, the testamentary trust is not reserved for large fortunes. It can prove relevant as soon as a person owns property, wishes to protect a vulnerable heir or wants to provide a framework for the transmission of their patrimony.

The testamentary trust is a flexible tool that adapts to a wide variety of family situations. It can be useful, in particular, to persons who are married, in a civil union or living in a de facto union, or who have minor children, children from a previous union or loved ones in need of particular protection.

In a context where blended families are increasingly numerous and patrimonial realities are becoming more complex, the testamentary trust makes it possible to put in place mechanisms adapted to the objectives and concerns of each family.

However, the creation of a testamentary trust requires a thorough analysis of the legal, tax and family aspects of your situation. The notary guides you through this reflection in order to design a structure that is consistent with your wishes, explain its consequences and ensure that it adequately meets the needs of the persons you wish to protect.

One of the advantages of the testamentary trust lies in the creation of a separate and autonomous patrimony. The property transferred to the trust does not belong directly to the beneficiaries, but is held and administered by the trustee in accordance with the terms set out in the will.

This structure may, in certain circumstances, offer greater protection against creditors or against certain claims that may be directed at a beneficiary. It may also help preserve a patrimony intended for a vulnerable loved one or provide a framework for the transmission of property in a particular family context.

When it is carefully designed and adapted to the testator’s objectives, the testamentary trust can be an effective tool for protecting the patrimony and for estate planning, particularly in a context of blended families, vulnerable beneficiaries or particular patrimonial considerations.

Another frequent concern is to protect the patrimony accumulated over the years and to ensure that it will be used in accordance with one’s intentions. Some parents wish to avoid having an heir receive too quickly a large sum that the heir would not yet be ready to administer. Others wish to ensure the financial security of a child living with a disability, a minor child or an adult child in a vulnerable situation.

The testamentary trust then makes it possible to provide a framework for the management and transmission of the property according to terms adapted to the situation of each beneficiary. The trustee can administer the patrimony, pay income or make certain distributions in accordance with the instructions set out by the testator, in the interest of the beneficiary.

This flexibility makes it possible to offer protection adapted to the particular needs of the family while ensuring a harmonious transmission of the patrimony.

The protection of loved ones is often one of the main reasons for using a testamentary trust. Many parents wish to avoid having an heir receive, all at once, a large sum that the heir would not yet be ready to manage independently. Others wish to ensure the financial security of a minor child, a child living with a disability, an adult child in a vulnerable situation or a loved one in need of particular supervision.

The testamentary trust then makes it possible to adapt the transmission of the patrimony to the real needs of the beneficiaries. The testator can set out the terms according to which the property will be administered, the income distributed or the capital delivered, while entrusting its management to a trusted person or institution.

Even when the beneficiaries are fully capable of managing their affairs, the testamentary trust can remain a worthwhile tool. It makes it possible, in particular, to ensure professional management of certain assets, to facilitate the intergenerational transmission of the patrimony and to meet certain family, estate or tax objectives specific to each situation.

The testamentary trust can also be used to directly benefit grandchildren or other loved ones by granting them benefits on terms adapted to their age, their needs or the objectives pursued by the testator.

The testamentary trust also makes it possible to provide a framework for the use, administration and distribution of income and capital for the benefit of the heirs. The testator can thus set out terms adapted to the particular situation of each beneficiary and entrust to a trustee the responsibility of administering the property in accordance with the testator’s wishes.

This flexibility makes it possible, in particular, to guide a beneficiary gradually in the management of their patrimony, to provide them with financial support adapted to their needs and to ensure a harmonious transmission of the property over a determined period.

The testamentary trust can also be a particularly worthwhile solution when a parent wishes to protect an heir with special needs. It is possible, in particular, to include provisions adapted to the situation of a child living with a disability, a vulnerable adult child or a loved one in need of ongoing support.

The trust can then be structured so as to meet the specific needs of the beneficiary, to provide them with a standard of living adapted to their situation and to ensure the administration of their property by a trusted person, according to the terms established by the testator.

Depending on the circumstances, such planning may also make it possible to preserve certain benefits or programs to which the beneficiary is entitled.

Lastly, the testator can provide that, at the beneficiary’s death, the property or capital then remaining in the trust will be transmitted to other beneficiaries whom the testator has designated, thus ensuring continuity in the transmission of the patrimony in accordance with the testator’s wishes.

To ensure the controlled transmission of one’s patrimony

Unlike a will providing for the immediate transmission of the property at death, the testamentary trust makes it possible to provide a framework for its transmission and administration over time. The testator can thus set out the terms according to which the income and capital will be distributed to the beneficiaries.

For example, when a beneficiary is a minor, the trust can be structured so as to meet the beneficiary’s needs in terms of education, housing, leisure, transportation or health, while providing for a gradual delivery of the property at different times in the beneficiary’s life. The testator can thus adapt the distributions to the age, maturity or particular needs of the beneficiary.

The testamentary trust can also avoid the direct delivery of substantial assets to a minor child and allow for the continuous administration of the property by a trusted trustee. It is also a particularly useful tool when a beneficiary has a particular vulnerability, has difficulty managing their finances or when it is desirable to regulate more closely the access to the patrimony transmitted.

Thanks to its great flexibility, the testamentary trust makes it possible to ensure a gradual and well-considered transmission of the patrimony while protecting the interests of the beneficiaries in accordance with the testator’s wishes.

The testamentary trust also offers great flexibility in the transmission of the patrimony. It makes it possible, in particular, to provide for what will happen to the property after the death of a first beneficiary, thus creating a form of planned estate transmission over several generations.

This tool is particularly useful in the context of blended families. It makes it possible, for example, to ensure the financial security of a surviving spouse while preserving the capital for the benefit of the children from a previous union.

The testamentary trust thus makes it possible to strike a balance between the interests of the various persons the testator wishes to protect. By adapting the terms of distribution of income and capital to their family situation, the testator can ensure that their wishes will be respected and that their patrimony will be transmitted in accordance with the objectives they pursue.

To benefit from certain tax advantages, including the deferral of the deemed disposition of property at the taxpayer’s death

Death generally results in a deemed disposition of the taxpayer’s property at its fair market value. This tax rule can have significant consequences, particularly when a person owns several rental properties, a large investment portfolio or other assets that have increased in value over the years.

In certain situations, this deemed disposition may result in a significant tax burden for the succession. The liquidators and the heirs may then be called upon to quickly find the liquidity needed to pay the taxes owing, which can sometimes force them to sell certain assets within time frames that are not always favourable.

Adequate estate planning often makes it possible to anticipate these issues and to put in place mechanisms aimed at facilitating the financing of the tax obligations arising from the death.

The testamentary trust can also, in certain circumstances, contribute to the achievement of particular tax objectives. At a taxpayer’s death, tax law generally provides for a deemed disposition of the taxpayer’s property at its fair market value, which may result in significant tax consequences for the succession.

However, certain rules make it possible to defer these tax consequences. For example, when a testamentary trust is created for the exclusive benefit of the spouse and the conditions set out in the Income Tax Act are met, it may be possible to benefit from the tax rollover provided for in subsection 70(6) of the Income Tax Act.

This mechanism makes it possible, in certain situations, to defer the taxation that would otherwise result from the death. Its application nevertheless remains subject to specific conditions, particularly as to the nature of the property transferred and the characteristics of the trust created for the benefit of the surviving spouse.

As the applicable rules are technical and involve several conditions, the establishment of a testamentary trust must always be the subject of a legal and tax analysis adapted to the particular situation of the testator and their family.

An illustration

Let us take the example of Mr. Guy Di Caprio, who married Ms. Melissa-Güler Sabancı in Turkey in 2019. After their marriage, the spouses established their first common residence in Québec without entering into a marriage contract before or after their union. Mr. Di Caprio is also the father of two children from a previous union who live in the United States, one of whom has Down syndrome.

In such a context, several estate planning objectives may coexist. Mr. Di Caprio might wish to ensure the financial security of his wife while preserving part of his patrimony for the benefit of his children. He might also want to put in place particular mechanisms so that his child with special needs benefits from lasting financial protection adapted to that child’s situation.

The testamentary trust makes it possible precisely to reconcile these different objectives. It can be structured so as to provide income or benefits to the surviving spouse during the spouse’s lifetime, while providing that the capital will ultimately remain intended for the children. It can also allow for the long-term administration of the property intended for a vulnerable beneficiary on terms adapted to that beneficiary’s particular needs.

The flexibility of the testamentary trust makes it a particularly useful tool in blended families, international situations and contexts where certain beneficiaries require greater protection.

The tax consequences of death are often a major concern in estate planning. When a person holds rental properties, a business or investments that have increased in value over the years, death may result in a significant tax burden for the succession.

In certain situations, the testamentary trust may be among the strategies considered in order to achieve certain tax, estate and patrimonial objectives. When it is properly structured and the conditions provided by law are met, it can, in particular, allow for the implementation of tax deferral mechanisms for the benefit of the surviving spouse.

However, the testamentary trust has advantages that go well beyond tax considerations. It also makes it possible to protect vulnerable heirs, ensure a gradual transmission of the patrimony, preserve certain family property and reconcile the interests of different beneficiaries in a blended family context.

As each situation is unique, the establishment of a testamentary trust must be the subject of a personalized analysis that takes into account the family situation, the estate objectives, the nature of the patrimony and the applicable tax rules.

Let us continue with the example of Mr. Di Caprio. Since 2019, Mr. Di Caprio and Ms. Sabancı have been co-owners of a triplex located in the Plateau-Mont-Royal, one of the dwellings of which serves as the family residence. The spouses have also accumulated RRSPs with an approximate value of $300,000 and each owns a motor vehicle.

In 2021, two children were born of their union, Delphine Alina Di Caprio and Maximus David Di Caprio. Mr. Di Caprio must therefore deal with a complex family reality: a spouse, two young children from his current union, two children from a previous union, one of whom has special needs, as well as substantial assets spread across several countries.

In such a context, the testamentary trust can be a particularly relevant tool. It makes it possible to reconcile several objectives that are sometimes difficult to harmonize: ensuring the financial security of the surviving spouse, protecting the minor children, providing mechanisms adapted to a vulnerable child, preserving certain family assets and organizing a fair transmission of the patrimony among the different branches of the family.

It also makes it possible to avoid having substantial assets transmitted directly to very young heirs by providing instead for professional administration and a gradual delivery of the income and capital on the terms chosen by the testator.

Mr. Di Caprio consults his notary in order to put in place estate planning adapted to his family and patrimonial situation. His main objective is to ensure the protection of his loved ones and to see to it that his patrimony is transmitted in accordance with his wishes after his death.

How can the financial protection of Ms. Sabancı be ensured while preserving the rights of the children from the first union and those born of the current marriage? How can the security and well-being of the child living with Down syndrome be guaranteed over the long term, while ensuring a fair transmission of Mr. Di Caprio’s patrimony?

In the present case, it would be relevant to examine with Mr. Di Caprio the establishment of several testamentary trusts meeting distinct objectives. A trust could be created for the benefit of each of the minor children in order to ensure their financial protection and provide a framework for the transmission of their patrimony. At the same time, a spousal trust could be established for the benefit of Ms. Sabancı in order to preserve her standard of living while allowing, subject to the conditions provided by tax law, the deferral of certain tax consequences at death.

Such a structure would also make it possible to reconcile the interests of the children from the previous union and those born of the current union, while ensuring particular protection for the child living with Down syndrome. The terms of each trust could be adapted to the needs, age, personal situation and objectives pursued for each of the beneficiaries.

With this approach, Mr. Di Caprio could protect his wife, ensure fairness among the different branches of his family and put in place lasting protection mechanisms for the child with special needs, while preserving the integrity of his patrimony and facilitating its future transmission.

Now it’s your turn!

How to proceed?

The decision to set up a testamentary trust rather than a will containing only direct legacies must be made in light of a thorough analysis of your family, patrimonial, legal and tax situation.

Every family has a different reality. The presence of minor children, children from different unions, a vulnerable loved one, a family business, income properties or assets located in several jurisdictions may justify the establishment of a more elaborate estate structure.

The notary guides you through this reflection by analyzing your objectives, your concerns and the needs of the persons you wish to protect. The notary can then recommend the planning mechanisms best suited to your situation, whether a traditional will, a testamentary trust or a combination of several legal and tax tools.

Well-designed estate planning makes it possible not only to protect your patrimony, but also to ensure its transmission in accordance with your wishes and in the interest of the persons who are dear to you.

To find out whether the testamentary trust is a solution suited to your situation, do not hesitate to contact us. We will take the time to analyze your family, patrimonial and tax context in order to propose estate planning that is consistent with your objectives and with the needs of the persons who are dear to you.

Sevgi KELCI, Notary, Trust & Estate Practitioner

LL.B., D.D.N., LL.M.

4989 Lavoisier

Saint-Léonard (Québec) H1R 1J2

Telephone: (514) 903-2255

Email: Sevgi.kelci@notarius.net

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