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 50% 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
→ Back to: Complete Canadian Tax Guide