The two main categories of Canadian trusts — inter vivos (during life) and testamentary (after death) — used to have very different tax rates that drove most of the decision. Then 2016 reforms equalized them and forced everyone to reconsider when each one actually makes sense. Here’s the current playbook.
The basic difference: when the trust is created
- Inter vivos trust = created during your lifetime. You sign a trust deed today, transfer assets in, name beneficiaries, the trust starts operating immediately. Examples: alter ego trust, joint partner trust, family trust, spousal trust set up during life.
- Testamentary trust = created BY YOUR WILL, takes effect at the moment of your death. The will’s trust provisions create the trust automatically when probate completes. Examples: spousal trust in will, trust for minor children, Henson trust for disabled beneficiary.
The 2016 reform that changed everything
Before 2016, testamentary trusts had a HUGE tax advantage: they were taxed at graduated rates (same as personal income tax — 15% on first bracket, 20.5%, 26%, 29%, 33%). Inter vivos trusts were taxed at the top marginal rate (33% federal) immediately.
This made testamentary trusts incredibly popular for income splitting — leave assets in trust for your spouse, who pays graduated rates on trust income, dramatically reducing the family tax bill.
Since 2016, that advantage is GONE for most testamentary trusts. They’re taxed at the top marginal rate just like inter vivos trusts. The only exception: a “Graduated Rate Estate” (GRE) gets graduated rates for the first 36 months after death. After 36 months, top marginal rate applies.
Inter vivos trusts: use cases that still work
- Alter ego trust — for 65+ Canadians wanting probate avoidance during life. See guide.
- Family trust with estate freeze — for business owners locking in current value to themselves, future growth to family trust
- Asset protection trust — limited use in Canada (creditor protection laws are weaker than US offshore alternatives, but inter vivos trusts add SOME layer of protection)
- Spousal trust during life — for high-income earners wanting to split income with lower-income spouse via trust mechanism (with TOSI limitations)
Testamentary trusts: use cases that still work
1. Minor children inheritance protection
You leave $500K to your minor kids via will. Without a trust: courts appoint a guardian of estate, money goes to the kids at age of majority (18 or 19 depending on province) in one lump sum. With a testamentary trust: trustees control distributions, can pay for education + reasonable expenses, and stagger the principal distribution (e.g., 1/3 at 25, 1/3 at 30, 1/3 at 35). Prevents the “lottery winner at 19” scenario.
2. Henson trusts for disabled beneficiaries
A specific type of testamentary trust for beneficiaries receiving provincial disability benefits (ODSP, AISH, BC PWD). Discretionary structure means assets aren’t legally “theirs” for benefit-calculation purposes — they keep their benefits while still being able to access funds when needed. The most important type of estate-planning trust for families with adult disabled children.
3. Spousal trust for blended families
For second marriages where you want to provide for your current spouse but ensure children from a first marriage eventually inherit. Spousal trust gives surviving spouse income for life; on their death, the trust capital goes to the original children rather than to the spouse’s heirs. Common when significant assets pre-date the second marriage.
4. Spendthrift protection
For adult beneficiaries with addiction issues, gambling problems, or chronic poor money management. Testamentary trust controls distributions — provides for needs without enabling destructive behavior.
The Graduated Rate Estate (GRE) 36-month window
When you die, your estate becomes a “GRE” for the first 36 months. During this window:
- Estate income is taxed at GRADUATED rates (15%, 20.5%, etc. — like personal income)
- $2,000 of pension income credit is available
- Charitable donation rules are more flexible (estate can choose which tax year to claim donations against)
- Off-calendar fiscal year-end is allowed
After 36 months: the estate (now a “graduated rate estate that timed out”) is taxed at TOP MARGINAL RATE on all income. Estate executors should aim to wrap up estate affairs within 36 months — most can.
Comparison table
| Feature | Inter Vivos | Testamentary |
|---|---|---|
| When created | During life | At death via will |
| Tax rate | Top marginal immediately | Top marginal (graduated for first 36 months only if GRE) |
| 21-year rule | Yes (exemptions for alter ego/joint partner) | Yes (exemption for spousal trust during spouse’s life) |
| Probate avoidance | Yes (assets in trust bypass probate) | No (trust created BY probate, so assets still go through probate first) |
| Setup cost | $3-12K legal fees | Included in will drafting cost |
| Annual administration | $1.5-4K accounting | $1.5-4K accounting (after creation) |
| Best for | During-life estate planning, business succession | Posthumous beneficiary control (minors, disabled, spendthrift) |
The honest decision framework
- Want probate avoidance during life? Inter vivos (specifically alter ego if 65+)
- Want business succession with estate freeze? Inter vivos (family trust)
- Want to control minor children’s inheritance? Testamentary (via your will)
- Need Henson trust for disabled beneficiary? Testamentary (mandatory structure)
- Spousal protection in blended family? Testamentary (spousal trust in will)
- Asset protection from creditors? Talk to a lawyer — Canada’s rules are weak; trusts help marginally but aren’t bulletproof
Frequently asked questions
Can my will create multiple testamentary trusts?
Yes — your will can create separate trusts for each beneficiary group. A common structure: one trust for your spouse, one Henson trust for your disabled adult child, one for your minor grandchildren. Each operates independently with its own trustees and distribution rules. The will provisions setting them up can be many pages long.
Can I have BOTH inter vivos and testamentary trusts?
Yes — many high-net-worth families have an alter ego trust holding non-registered investments during life, plus testamentary trusts in the will to handle the rest of the estate. They complement each other; they’re not alternatives. Estate plan often involves coordinating both.
What’s the cost of a testamentary trust?
No SEPARATE setup cost beyond the will drafting (good wills with trust provisions cost $1,500-$5,000 vs $500-$1,500 for simple wills). After death, the trust pays ongoing accounting fees of $1.5-4K annually for T3 returns, same as inter vivos trusts. Trustee compensation (typically 1-3% of trust value annually for professional trustees) is also an ongoing cost.
Does a testamentary trust avoid probate?
NO — because the testamentary trust is created BY the will, assets must go through probate to fund it. If probate avoidance is the goal, an INTER VIVOS trust set up during your life is the right tool. Testamentary trusts solve the “how is the inheritance managed after probate completes” problem, not the “how do I bypass probate” problem.
Can I change a testamentary trust after creation?
Not by you — you’re dead. Trustees may have limited power to modify per the trust deed terms. Beneficiaries may apply to court to modify under provincial trust legislation in some circumstances. Practically: most testamentary trusts run for years/decades exactly as you wrote them. Take care drafting because amendments are difficult.
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