Overview: Two Types of Trusts
| Feature | Inter Vivos Trust | Testamentary Trust |
|---|
| Also called | Living trust | Estate trust |
| Created | During settlor’s lifetime | Through a will, on death |
| Effective | Immediately | Upon death |
| Funded | Lifetime transfers | Estate assets |
| Tax rate (undistributed) | Top marginal (~50%) | Usually top marginal* |
| 21-year rule | Yes | Yes (from creation) |
*Exceptions: Graduated Rate Estates (first 36 months) and Qualified Disability Trusts.
Inter Vivos (Living) Trusts
Characteristics
| Feature | Details |
|---|
| Creation | Trust deed signed during lifetime |
| Settlor | Usually contributes initial asset |
| Funding | Transfer assets or subscribe for shares |
| Revocable or not? | Typically irrevocable (tax reasons) |
| Takes effect | Immediately upon creation |
Common Uses
| Purpose | How It Works |
|---|
| Family business succession | Hold company shares |
| Income splitting | Distribute income to beneficiaries |
| Asset protection | Remove assets from personal estate |
| Cottage succession | Transfer family property |
| Probate avoidance | Assets not in probate estate |
Tax Treatment
| Income Type | Tax Rate |
|---|
| Retained income | Top marginal rate |
| Distributed income | Beneficiary’s rate |
| Capital gains (retained) | Top rate on 66.67% inclusion |
| Capital gains (distributed) | Beneficiary’s rate |
Key Dates
| Event | Timing |
|---|
| Trust year-end | December 31 |
| Tax return due | 90 days after year-end |
| 21-year deemed disposition | 21 years from creation |
Testamentary Trusts
Characteristics
| Feature | Details |
|---|
| Creation | Through a will |
| Settlor | The deceased person |
| Funding | Assets from the estate |
| Revocable? | Can modify will before death |
| Takes effect | Upon death |
Common Uses
| Purpose | How It Works |
|---|
| Trust for minor children | Manage inheritance until adulthood |
| Spousal trust | Income to spouse, capital to children |
| Qualified Disability Trust | Protect disabled beneficiary |
| Henson trust | Maintain disability benefits eligibility |
| Blended family planning | Provide for spouse and children separately |
Graduated Rate Estates
The first 36 months after death, an estate can be designated as a Graduated Rate Estate (GRE):
| Feature | GRE Benefit |
|---|
| Tax rates | Graduated (lowest brackets first) |
| Donations | Can be claimed in year of death or estate |
| Year-end | Can choose any date |
| Loss carryback | Capital losses to year of death |
| Duration | Maximum 36 months |
Qualified Disability Trusts (QDTs)
| Feature | QDT Benefit |
|---|
| Tax rates | Graduated rates (permanent) |
| Beneficiary | Must qualify for DTC |
| Election | Made annually with T3 return |
| Benefit | Lower tax on retained income |
Non-Qualifying Testamentary Trusts
| Feature | Tax Treatment |
|---|
| After GRE period | Top marginal rate on retained income |
| No joint election | Same as inter vivos |
| Still useful | For control, protection, minor beneficiaries |
Side-by-Side Comparison
| Factor | Inter Vivos | Testamentary |
|---|
| Created | During lifetime | At death via will |
| Probate | Can avoid | Goes through probate |
| Tax rates | Top marginal | Top marginal (except GRE/QDT) |
| Control during life | Settlor may be trustee | N/A |
| Asset protection | Yes, if properly structured | Limited |
| Income splitting | Yes (subject to TOSI) | Yes (subject to TOSI) |
| 21-year rule | From trust creation | From date of death |
| Cost to create | $3,000–$10,000 | Legal fees for will |
| Ongoing costs | Annual returns, administration | Annual returns, administration |
When to Use Inter Vivos Trusts
Best For
| Situation | Benefit |
|---|
| Business owners | Income splitting, LCGE multiplication |
| Cottage owners | Multi-generational transfer |
| Asset protection needs | Separate assets from estate |
| Probate planning | Assets avoid probate |
| Immediate effect needed | Trust operates now |
Example: Family Business
A business owner creates an inter vivos family trust to hold shares of their company:
- Trust distributes dividends to adult family members
- Each beneficiary can use their LCGE on sale
- Succession planning built in
- Asset protection if structured correctly
When to Use Testamentary Trusts
Best For
| Situation | Benefit |
|---|
| Minor children | Manage inheritance until adulthood |
| Disabled beneficiary | QDT with graduated rates |
| Spendthrift beneficiary | Control distributions |
| Second marriage | Provide for spouse and children |
| First 36 months | GRE graduated rates |
Example: Trust for Minor
A parent’s will creates a testamentary trust for their 10-year-old child:
- Trustee manages assets until child is 25
- Funds available for education, health, maintenance
- Capital distributed in stages (e.g., 1/3 at 25, 30, 35)
- Protects inheritance from poor decisions
Spousal Trust Comparison
Inter Vivos Spousal Trust (Alter Ego/Joint Partner)
| Feature | Details |
|---|
| Creator age | 65+ |
| Beneficiaries | Settlor and/or spouse only |
| Rollover | Assets transfer at cost |
| 21-year rule | Applies |
| Probate | Avoided |
Testamentary Spousal Trust
| Feature | Details |
|---|
| Created | At death via will |
| Income beneficiary | Surviving spouse |
| Capital beneficiary | Children or others |
| Rollover | Assets transfer at cost |
| 21-year rule | Starts at death |
| Probate | Estate goes through probate |
Tax Planning Considerations
Attribution Rules
| Trust Type | Attribution Risk |
|---|
| Inter vivos | Yes — if funds from settlor to spouse/minor |
| Testamentary | Generally no — settlor is deceased |
TOSI Rules
| Trust Type | TOSI Applies? |
|---|
| Inter vivos | Yes — splits to related minors/some adults |
| Testamentary | Yes — same rules apply |
21-Year Planning
| Trust Type | 21-Year Date |
|---|
| Inter vivos | 21 years from creation |
| Testamentary | 21 years from death |
Both require planning to avoid forced capital gains recognition.
Cost Comparison
Inter Vivos Trust
| Cost | Amount |
|---|
| Legal setup | $3,000–$10,000 |
| Annual T3 return | $500–$2,000 |
| Ongoing advice | $500–$2,000/year |
Testamentary Trust
| Cost | Amount |
|---|
| Will drafting | $1,000–$5,000 |
| Probate fees | 0.5–1.5% of estate (varies by province) |
| Annual T3 return | $500–$2,000 |
| Ongoing administration | $500–$2,000/year |
Choosing Between Trust Types
Decision Framework
| Question | If Yes, Consider |
|---|
| Need control during lifetime? | Inter vivos |
| Want to avoid probate? | Inter vivos |
| Planning for minor children? | Often testamentary |
| Disabled beneficiary? | QDT (testamentary) |
| Business income splitting? | Inter vivos |
| Asset protection priority? | Inter vivos |
| Simple estate plan? | Testamentary might be enough |
| Cost a concern? | Testamentary is simpler |
Often Both
Many estate plans include both types:
- Inter vivos trust for business/cottage now
- Testamentary trust for residual estate
Key Takeaways
- Inter vivos trusts work during your lifetime; testamentary trusts are created at death
- Both generally pay tax at top marginal rates on undistributed income
- GREs (first 36 months) and QDTs are exceptions with graduated rates
- Inter vivos trusts can avoid probate; testamentary trusts cannot
- Both are subject to TOSI rules for income splitting
- Both face the 21-year deemed disposition rule
- Consult estate and tax professionals for your situation
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