The short answer
Since 2016, a trust created by a will pays the top tax rate on income it keeps. Only an estate that qualifies and designates itself as a graduated rate estate, for up to 36 months after death, and a qualified disability trust keep graduated rates. A will that splits income through several trusts may no longer work as intended.
trustsEveryone has an estate, so this is the one trust topic that applies to every physician and dentist. If your will was drafted before 2016, it may also be the one that most needs a second look.
Wills from that era often created several trusts on purpose. Each trust was taxed at graduated rates, like a person, so dividing an inheritance among several trusts spread the income across several sets of low brackets. A 2016 change ended that for most trusts. The will still works as a legal document, but the tax plan inside it may no longer do what it was drafted to do, while each trust still files a return every year.
This is orientation, not legal advice. Your lawyer drafts and updates the will; your accountant files the estate's returns.
A testamentary trust is a trust that arises on death, usually under a will. Before 2016, each one was taxed at graduated rates and could choose its own year-end. Since 2016, a testamentary trust pays the top rate on income it keeps, 53.53 percent on ordinary income in Ontario in 2026, and uses a December 31 year-end.
Two kinds keep graduated rates: the graduated rate estate and the qualified disability trust. Only the graduated rate estate can also choose a year-end other than December 31; a qualified disability trust keeps the calendar year. Everything else in a will, including trusts for children, a spouse or grandchildren, is now taxed like a family trust on income it keeps.
The graduated rate estate is the estate itself, for a limited time. It applies to an estate that qualifies and designates itself as the graduated rate estate of the person who died, for up to 36 months after death. To qualify, the estate must:
The status is not automatic. It depends on the executor and the estate's accountant making the designation on time.
What it offers. The estate pays tax at graduated rates rather than the top rate, although, like any trust, it gets no basic personal amount. It can choose a year-end other than December 31, which gives the executor flexibility over when income is recognized. It is exempt from the alternative minimum tax. And it can carry capital losses realized in its first three taxation years back to the deceased's final return (for deaths after August 11, 2024), which is one of the main tools accountants use to limit double tax on private company shares at death.
What it is worth. As an illustration, if the estate earns $40,000 of interest in a year, keeps it rather than paying it out, and has no other taxable income, graduated rates produce about $7,620 of tax in 2026, compared with $21,412 at the top rate a trust would otherwise pay.
The 36-month limit. Once 36 months have passed, the estate loses the status and is taxed like any other trust: top rate and calendar year. An estate that takes years to settle loses the benefit partway through, which is one reason executors plan the timing of sales and distributions.
The second exception reflects one of the most important remaining uses of a trust in a will: managing money for a beneficiary with a disability after the parents are gone.
A qualified disability trust keeps graduated rates on income it keeps. It must:
Unlike the graduated rate estate, it still uses a December 31 year-end. It also carries a recovery tax. The tax saved by graduated rates can be clawed back if, at the end of a year, no remaining beneficiary elected with the trust in an earlier year (for example, after the only electing beneficiary dies), if the trust stops being resident in Canada, or if capital is paid to a beneficiary who did not elect with the trust for that year or an earlier year.
The Ontario Disability Support Program caution. Meeting the federal test for this trust says nothing about provincial benefits. In Ontario, how a trust is structured and what it pays out can affect eligibility for the Ontario Disability Support Program, and many families use a fully discretionary trust, often called a Henson trust, for that reason. This is specialist legal work, and the tax plan and the benefits plan need to be designed together.
Parents often want a child to benefit from a trust without handing over the money early. One rule helps. Where trust income is held for a beneficiary who had not turned 21 by the end of the year, and the child's right to it has vested without depending on any trustee's discretion, and is not subject to a future condition other than surviving to an age of 40 or less, the Income Tax Act treats that income as payable to the child.
The effect is that the income is taxed at the child's graduated rates while the trustees keep the money and decide when to pay it out. This is not an election; it applies when the conditions are met. It does not fit a fully discretionary trust, because the child's right must be vested. Whether it fits your family's wishes is a drafting question for your lawyer.
At death, you are generally treated as having sold your capital property at fair market value, including private company shares, investments and real estate, and the estate is treated as having bought it back at that value. The main exceptions:
Registered plans are separate: the value of an RRSP or RRIF is generally taxed on the final return unless it passes to a spouse or a qualifying dependant.
For an incorporated professional, the shares of the professional corporation are often the largest single item, and the gain on them is taxed on the final return. Without planning, the same value can be taxed again when money later comes out of the corporation. The graduated rate estate's loss carryback is one of the main tools accountants use after death to reduce that second layer.
The tax on the final return is often a business owner's largest single bill, and it arrives when the estate may hold mostly shares, property and registered plans rather than cash. Life insurance pays at death, so it is one way to provide that liquidity without selling assets in a hurry. When a private corporation receives the death benefit as beneficiary, the proceeds less the policy's adjusted cost basis are generally added to its capital dividend account, as the corporate-owned life insurance guide explains, and the estate bond shows one way that is structured. Disclosure: I am a licensed insurance and investment advisor and life insurance is among the products I place, so have your lawyer and accountant review any structure, including one I suggest.
A will distributes assets: you can leave them outright, and the person receiving them decides what to do. A trust goes further, setting who manages the assets, for whom, and when they are paid out, such as a trust for grandchildren that pays tuition only as bills arrive. Since 2016, control is usually the main reason to choose a trust, although tax still matters in the cases above: the graduated rate estate, a qualified disability trust and income held for a beneficiary under 21.
For life insurance with a minor child as beneficiary, a separate trust in your will is often unnecessary. In Ontario, you can appoint a trustee for a beneficiary in the policy or by a declaration, and the insurer then pays that trustee. That appointment is itself a trust arrangement, created outside your will, and its limits matter: if the designation sets no trust terms, the trustee can only hold and invest the money until the child turns 18, may not use it for any purpose in the meantime, and must pay it to the child at 18.
With no trustee at all, smaller amounts can go to the parent or guardian the child lives with, while amounts over $35,000 are generally paid into court unless a court has appointed a guardian of the child's property. The child generally becomes entitled to the remaining funds at 18. Earlier payments may be permitted under the applicable legal rules or with court approval.
If you want the money used for the child along the way, or held past 18, the designation needs trust terms, through an insurance trust declaration or a trust in your will, and your lawyer should align it with the rest of your will.
I do not draft wills or set up trusts; that is your lawyer's work. Where I can help is with the liquidity side, how insurance and investments are owned, and making sure these questions reach your lawyer. For how trusts fit an incorporated professional's plan more broadly, see the family trusts guide. For the wider plan around your corporation, the financial planning for physicians and financial planning for dentists pages explain how I work with each profession.
It is an estate that qualifies and designates itself as the graduated rate estate of the person who died, for up to 36 months after death. It pays tax at graduated rates rather than the top rate, can choose a year-end other than December 31, and only one estate per person can qualify.
Before 2016, each trust created by a will was taxed at graduated rates and could choose its year-end, so wills often created several trusts to split income. Since 2016, these trusts pay the top rate on income they keep and use a December 31 year-end. Graduated rate estates and qualified disability trusts keep graduated rates, but only a graduated rate estate can choose another year-end; a qualified disability trust uses December 31.
A beneficiary named in the will or other instrument that created the trust, who meets the CRA's eligibility criteria for the disability tax credit for the year. The trust and the beneficiary must elect jointly each year, and a beneficiary can elect with only one trust for a year. Qualifying for this tax treatment does not mean qualifying for Ontario Disability Support Program benefits, which have their own rules.
Sometimes. Where income is held for a beneficiary who was under 21 for the whole year, and the right to it is vested rather than left to the trustees' discretion, the Income Tax Act treats the income as payable to the child, so it is taxed at the child's rates while the trustees hold the money.
Not necessarily a separate one. In Ontario you can appoint a trustee for the child in the policy or by a declaration, which is itself a trust arrangement outside the will, and the insurer then pays the trustee. Without trust terms in the designation, though, the trustee can only hold and invest the money until the child turns 18 and must then pay it to the child. If you want the money used for the child along the way, or held past 18, the designation or your will needs trust terms.
