A testamentary trust is simply a trust created on the death of a person. Strictly interpreted, all wills create testamentary trusts. However, some wills go into more detail than others and deliberately set out to create a particular type of trust with a significant life of its own after the death of the testator. These wills are what are typically referred to as wills creating testamentary trusts.
Testamentary trusts are powerful tax planning and asset protection tools for the beneficiaries under the will. For example, children under the age of eighteen are not taxed at penalty rates on income derived through a testamentary trust (as is usually the case with other types of unearned income). Further, assets held in a testamentary trust are generally not taken into account in determining old age pension entitlements.
Testamentary trusts can be used to protect valuable family assets from the risk of a spendthrift family member or a family member who is not a good business person or investor and who stands a good chance of getting themselves into financial trouble.