A testamentary trust is a trust created by a will. It comes into effect after the person making the trust and the will dies. This is as opposed to an inter-vivos trust, which comes into effect during the life-time of the person making the trust.
This area of the law is governed in British Columbia now by the Wills, Estates and Succession Act.
If it is a simple trust, it can be created and the terms of the trust agreement can be written into a will itself. An alternative for more complex testamentary trusts is that it is created within a will, and the trust agreement is attached to the will and “incorporated by reference”.
A trust is a simple relationship where one holds property for another. The “settler” gives the “trustee” property to hold in trust for the “beneficiary”. Trusts can be express or implied by law. An express trust comes into existence after the person executing the will and the trustee make an agreement to make a trust as described above. This is called the trust agreement, or trust instrument.
The settler (the person who executes the will) and trustee may agree on a number of terms, such as what the trustee must do with the trust property (“trustee’s duties”) and what, if anything, the trustee can do with the trust property if they so wish (“trustee’s powers”).
A trust agreement may give very specific instructions to the trustee as to what they must do, and how and when they must do it; this creates what is known as a “bare trust”. On the other end of the spectrum, a trust agreement may give a trustee absolute discretion to give effect to the trust as they see fit (a “discretionary trust”). Usually, a trust is somewhere in the middle of the spectrum between a bare trust and a discretionary trust where the trustee has certain duties, with discretion as to how to carry those duties out.
This type of trust can be used to put aside property in your estate so that it is not immediately passed on to the intended beneficiaries at the time of your death.
Such trusts are often set up for young children so that they may be taken care of by your estate until they are adults, at which time they can inherit the remainder. Even with adult children, some parents worry that their children may squander a large sum of money if it is given to them in its entirety. They are also used to establish a fund from which a person with disabilities can be cared for after your death.
When you decide to create a trust, testamentary or otherwise, always do so in consultation with a lawyer of a professional trustee. While it is merely a contract, there are still considerations to be made in order to create a trust that will be upheld by law. Here is a brief discussion of some things to keep in mind:
Because it is a testamentary document, a testamentary trust must meet all the formalities of a will to be valid. In addition to this, there are rules to be kept in mind when incorporating a document into a will, such as a trust agreement, via reference.
For obvious reasons, a trust may be held invalid if it is made for an illegal purpose such as defrauding a creditor, or if the conditions applied in a trust are against public policy such as if they are discriminatory, or if they interfere with parental duties or marital relations.
If a testamentary trust deals with real property, the Land Title Act becomes involved and adds a few procedural requirements in order to create and execute a valid trust. Another thing to discuss with your lawyer is the rule against perpetuities, which holds that an interest in a gift in a will must vest within a certain amount of time. A testamentary trust must generally not be one that lasts forever.
Lastly, in certain situations, beneficiaries may apply to the court to compel the trustee to give them the entirety of the trust property, as it is ultimately their property. This is an important thing to discuss with your lawyer, especially in a case where the beneficiary may lose a government benefit, such as a disability pension, if their income increases to a certain point. Such a beneficiary may lose this type of benefit even if they do not apply to court. A testamentary trust can be set up in a way that this can be prevented.
The most important thing however, is that you pick a competent trustee who you can trust to keep your beneficiaries’ interests safe.
- J. Shukla, Articled Student
Please contact us at Hemminger Law Group if you want to set up your will or trust.
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