Simple Wills vs Testamentary Trust Wills: Which is Right for You?

When starting your estate planning journey, you will be faced with the choice of having a Simple or Testamentary Trust Will prepared. A simple will is a straightforward document that distributes assets directly to named beneficiaries. A testamentary trust will is more complex. Instead of transferring assets directly to beneficiaries, the assets are transferred to a trustee who holds and manages these assets in a trust for your beneficiaries.

Simple Wills are typically more cost-effective and time-efficient to prepare and administer. However, they have certain limitations, including:

• Limited tax planning opportunities. Beneficiaries will be required to include income earned from inherited assets in their personal taxable income, which may result in taxation at higher marginal rates depending on their individual circumstances.
• In the event of a beneficiary’s marriage breakdown, inherited assets held personally may be subject to equalisation claims or division under applicable provincial family law legislation, depending on factors such as how the assets were used during the marriage and the jurisdiction’s specific family property laws .

Testamentary Trust Wills are better suited for complicated matters, with protections such as:

• Trustees have discretion to distribute trust income and capital among a class of beneficiaries in a manner that may achieve tax efficiencies, subject to compliance with the Income Tax Act and applicable anti-avoidance rules. Distribution decisions must be made in accordance with the terms of the trust and the trustee’s fiduciary duties, and may consider the respective marginal tax rates of potential beneficiaries within the permitted class .
• Flexibility: the Testator can establish terms in the will that permit beneficiaries to have discretion to distribute trust income and capital among a class of beneficiaries in a manner that may achieve tax efficiencies, subject to compliance with the Income Tax Act and applicable anti-avoidance rules. Distribution decisions must be made in accordance with the terms of the trust and the trustee’s fiduciary duties, and may consider the respective marginal tax rates of potential beneficiaries within the permitted class .
• Provides enhanced asset protection for vulnerable beneficiaries, including those with disabilities, those experiencing substance dependency issues, or those who may lack capacity to manage financial affairs, by maintaining assets within the trust structure where they are managed by a trustee subject to fiduciary obligations.

Testamentary trust wills may be particularly appropriate for blended families, substantial estates, beneficiaries who are minors or lack financial experience, and situations requiring enhanced asset protection or tax planning. However, the choice between a simple will and a testamentary trust will should be made based on individual circumstances after consultation with qualified legal and tax advisors. Each estate planning situation is unique and requires professional assessment.

If you have any questions on what will is right for you, please do not hesitate to contact me to discuss. I am here to help.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.