Can a Testamentary Trust Benefit You? The Wealthy Barber Explains

An inheritance is a great responsibility, and not every recipient can handle it with ease. How do you mitigate this when estate planning? Below, David Chilton – a former dragon on CBC's Dragons' Den and author of best-selling personal finance guides The Wealthy Barber and The Wealthy Barber Returns – explains how a testamentary trust can act as a useful buffer. (The following article is part of a series created in collaboration with RBC Wealth Management Royal Trust and was first published by RBC Wealth Management.)

The Wealthy Barber explains the benefits of a testamentary trust

By David Chilton, The Wealthy Barber

In this article we're going to take a brief look at testamentary trusts.

How exciting is that? Try to contain yourself! "Todd, turn off the hockey game! Yes, I know it's 5 to 5 and in overtime, but you must read Chilton's article on testamentary trusts. It's captivating!"

Ok, I admit that is not a likely response to this piece. Or either of my books, for that matter. (Thought I would say that before you did.)

But, honestly, testamentary trusts really are quite interesting. Not riveting, but quite interesting.

More importantly, I think they can play a very helpful role in many Canadians' estate plans.

So, what is a testamentary trust?

Quite simply, it's a trust that is created on the day a person dies. Or, as my dad stated, it kicks in when you kick the bucket. Not surprisingly, my father has never been asked to write copy for the financial industry.

The trust is established through the transfer of ownership of some of the deceased's assets. A designated-in-the-will trustee, could be an individual or a trust company, administers the trust according to the instructions as to how those assets are to be used for the benefit of the beneficiary.

Well, la ti da. Doesn't that sound like something only the ultra-rich would get involved with? The Thurston Howell III crowd?

I must admit that I kind of thought that way myself until relatively recently.

What changed my mind?

Talking to a bunch of friends and colleagues about testamentary trusts while I wrote and tested a script for a video on the subject.

Very illuminating conversations.

Sadly, many families have a member who battles addiction issues. For obvious reasons, it is often unwise to leave that person his/her inheritance directly.

In fact, two of the testers said how thankful they were that their parents had left them money through a trust. They are well aware of their challenges and felt the trust very effectively protected them from themselves.

Several others shared stories about family members quickly squandering inheritances as that protection wasn't in place.

And it's not just beneficiaries battling addictions that could benefit from a testamentary trust being used. What about someone who has a track record of consistently managing his or her money irresponsibly? A spendthrift or a too-aggressive risk taker?

Or perhaps, a beneficiary is dealing with a disability that makes financial management either impossible or incredibly stressful. A trust makes perfect sense here.

The feedback to the video script also provided a strong reminder about the now-high prevalence of blended families and the often-associated estate-planning complexities. Testamentary trusts are a great aid for those building a plan to tackle those issues.

For example, perhaps you want to make sure your current spouse is taken care of while also preserving a certain level of capital for your children from a first marriage.

You can see why I think testamentary trusts can play a very important, a very helpful role in estate planning.

They are a tool — a quite flexible tool — that can help you to help the people you love. Again, to protect them.

They're not for everyone but more people should look at them than do.

See that was interesting, wasn't it?

But not riveting.