Every couple of weeks, I get a call someone who has lost a parent and has been appointed executor of the estate. They explain to me that one of the estate beneficiaries — typically a sibling — struggles with a spending problem, a history of addiction, a mental health challenge, a cognitive disability or is in an abusive relationship. Sometimes more than one of those factors are at play.
I’m told that the will leaves the sibling’s share of the inheritance directly with them. There is no testamentary trust or protective structure. Although the executor advised the parent to set up a trust, they declined because of concerns about stigma, legal costs or a misunderstanding of a trust’s benefits. Sometimes they simply didn’t want to deal with it.
Unsurprisingly, the caller is worried that as soon as their sibling receives the inheritance, it will be depleted within months. They don’t know what to do.
The executor is in an impossible position. They have legal duties to distribute, but moral and practical concerns about how the beneficiary will handle the money.
Executor versus protector
The executor’s duty is to administer and distribute the estate according to the will, not to rewrite it. Without a testamentary trust, there’s no legal authority to hold back funds from a beneficiary — no matter the circumstances.
Even if the executor believes the beneficiary will misuse the inheritance, they cannot unilaterally impose restrictions. If the executor delays or tries to hold the funds informally, they risk legal action for breach of trust.
However, even without a testamentary trust, there are practical mechanisms an executor (with advice) can use:
- Delay distribution temporarily while obtaining legal advice.
- Apply to court for directions or to establish a protective trust if the beneficiary is incapable and a guardian or Public Guardian and Trustee is involved.
- Encourage voluntary management. The beneficiary may agree to have funds invested and drawn down over time under a separate investment agreement.
- With consent, establish an annuity settlement option that can mimic controlled payments.
Annuity settlement options
An annuity settlement option allows the executor to use the beneficiary’s inheritance to purchase an annuity, providing regular payments over time instead of a single lump-sum distribution.
The annuity then pays regular, guaranteed income (monthly, quarterly or annually) for a set period or for life. This approach transforms an inheritance into a structured stream of income and capital payments, providing sustained financial support while preventing immediate access to a large lump sum.
The purchase of an annuity can be viewed as part of the distribution process. The executor is not withholding or investing funds indefinitely, they are simply using estate assets to fulfill the distribution in a structured form.
The executor cannot impose an annuity settlement option if the will calls for an outright gift. But if the beneficiary agrees in writing, this can be a practical, voluntary alternative.
The executor distributes the inheritance to purchase an annuity in the beneficiary’s name (with their consent). The annuity issuer (typically a life insurance company) provides the payment schedule and handles disbursements. This satisfies the executor’s duty to distribute the estate as the funds are transferred out of the trust and provided to the beneficiary in a structured manner.
| Advantages | Limitations |
| Provides predictable, stable income to the beneficiary. | Irrevocable — once set up, no flexibility if circumstances change. |
| Simplifies administration as the annuity issuer handles payment and issuance of the tax slips. | Requires cooperation — the beneficiary must consent. |
| No trustee fees, trust return preparation or filing fees. | May impact disability benefits if not carefully structured. |
| Beneficiary receives income directly without relying on an executor’s discretion. | Inflation risk if not indexed. |
In addition to helping vulnerable beneficiaries, the settlement annuity can also provide a strategic exit option for trusts approaching the 21-year deemed disposition rule.
Under subsection 104(4) of the Income Tax Act, most trusts are deemed to have disposed of their capital property every 21 years at fair market value. This deemed disposition can trigger significant unrealized capital gains even when no asset has been sold.
To avoid a large tax bill in the trust, trustees often distribute property to beneficiaries before the 21-year anniversary. But in practice, this can create serious challenges:
- The trust may hold volatile or illiquid assets (such as investment portfolios or real estate).
- Forced liquidation may result in selling assets during unfavourable market conditions.
- The beneficiary may face unintended tax consequences.
- The beneficiary may not be financially responsible.
- The trustee may be aging, unwell or seeking to simplify administration.
In such cases, transferring assets into an annuity in satisfaction of the beneficiaries’ entitlement can be an efficient way to satisfy the distribution requirement before the 21-year rule triggers tax and provide beneficiaries with long-term structured income protection.
An example
A 2006 family trust is set to reach its 21-year deemed disposition date in 2027. The primary beneficiary, Jordan, is a 58-year-old sibling with bipolar disorder and poor money management skills. The trustee (Jordan’s sister and lawyer) wants to avoid the pending 2027 tax event and close the trust responsibly in 2025.
By liquidating the portfolio and using the proceeds to purchase a life annuity for Jordan, the trustee:
- voids the deemed disposition by distributing the assets before the 21-year anniversary,
- satisfies Jordan’s beneficial entitlement,
- ensures Jordan receives a fixed amount per month for life and
- eliminates the need for ongoing trust administration, trustee fees or annual T3 return preparation and T3 slip filings.
Executors and trustees increasingly face complex intersections of tax law, family dynamics and mental health realities. Traditional tools like testamentary trusts are ideal but not always available or practical, especially when the will is silent or a trust is approaching the 21-year rule.
The settlement annuity option bridges that gap. It transforms an inheritance or trust distribution into a sustainable income stream, respects the beneficiary’s entitlement and provides a legally defensible method to protect both the fiduciary and the recipient.
The settlement annuity option represents a thoughtful blend of tax prudence, fiduciary responsibility and human compassion.
Michael Kulbak, MBA, CPA, CMA, TEP is principal of Kulbak Trust Solutions in Mississauga, Ont.