Alter Ego Trust and Joint Partner Trust Lawyers in British Columbia
An alter ego trust and a joint partner trust are living trusts available in British Columbia to people aged 65 or older, letting you move assets into a trust without triggering an immediate capital gains tax. They can keep those assets out of probate and are harder to challenge than a will, though they suit particular estate planning situations rather than everyone.
Lawyers for Alter Ego Trust and Joint Partner Trust
Many clients have a good understanding of Wills, but only a general familiarity with the concept of a trust. Alter Ego Trusts and Joint Partner Trusts are often asked about, but far less understood as an important estate planning tool. Prior to speaking with one of our estate planning lawyers, you may wish to familiarize yourself with some basic information concerning Alter Ego Trusts and Joint Partner Trusts. Our estate planning lawyers can help you determine whether either of these trusts would be advantageous and recommended as part of your estate plan.
What are Trusts? And What are Alter Ego Trusts/Joint Partner Trusts?
A trust is a legal relationship in which a ‘settlor’ transfers assets to a ‘trustee’ to hold on behalf of one or more ‘beneficiaries’. A trust is not a separate legal entity, but is treated as such for Canadian income tax purposes. Trusts can be created during the lifetime of the settlor – these are called inter vivos trusts – or they can be created on death, typically within the Will of the deceased – these are called testamentary trusts.
Many clients create trusts with the intent to protect certain assets for beneficiaries like a spouse or children. Trusts are also employed to enhance privacy, avoid the probate process and related expenses, and protect the assets from legal challenge.
Alter Ego Trusts and Joint Partner Trusts are specific types of inter vivos trusts permitted under the Income Tax Act to enable Canadians to arrange their assets in a manner that results in an efficient transfer on death. An Alter Ego Trust can be settled by an individual, whereas a spousal couple can settle a Joint Partner Trust. By transferring assets into these trusts, the trust becomes the legal owner of the assets. The assets are distributed to the named beneficiaries following the death of the settlor (or both settlors in the case of a Joint Partner Trust); these assets do not transfer into the estate of the deceased settlor(s) and are not distributed according to the Will of the deceased.
There are a few important nuances and restrictions that must be considered. Firstly, the settlors must be residents of Canada and over 65 years of age. Secondly, the income and capital of the trust must only benefit the settlor(s) during their lifetime, but can be distributed to other beneficiaries on the death of the settlor(s). Thirdly, assets can be transferred into the trust on a tax-deferred basis, at cost, without triggering a taxable disposition. These trusts are not employed for tax minimization; the usual effect on overall taxation is net neutral. A taxable disposition may occur in future within the trust when the asset is transferred or sold, or on the death of the settlor (in the case of the Alter Ego Trust) or on the death of the last settlor to die (in the case of a Joint Partner Trust). Finally, certain types of assets cannot be transferred into these trusts, such as registered bank accounts, or may not be recommended to transfer into the trust, such as private company shares or U.S. assets tax reasons. An accountant should always be consulted to determine whether any particular assets cannot be transferred into the trust on a tax-deferred basis or whether other tax planning strategies should be employed.
What Are the Main Benefits of Settling an Alter Ego Trust or Joint Partner Trust?
- Reduced Probate Fees
Assets that form part of an estate are subject to a probate fee of approximately 1.4%. Any asset transferred to an Alter Ego Trust or Joint Partner Trust will not form part of the estate and is therefore not subject to a probate fee. This can result in savings of approximately $14,000 for each million dollars of assets transferred into the trust.
- Protecting Assets
In British Columbia, a child or spouse of a deceased person has the right to bring a claim to vary the will of a deceased person that they believe did not make “adequate provision” for them. Our litigation lawyers are adept at bringing claims on behalf of disinherited children and spouses, which you can read more about here and here. The court will consider a variety of factors in assessing the claim. If the claim succeeds, the court will vary the will to make the distribution they think is fair and just. This presents a very significant risk to testamentary autonomy. For this reason, many individuals choose to settle their assets into an Alter Ego Trust or Joint Partner Trust, which cannot be attacked through wills variation because a trust is not a will.
- Discretion/Privacy
Whereas an estate that proceeds through probate becomes a matter of public record, the distribution of assets in a trust is a private affair, the disclosure of which is limited to the beneficiaries of the trust.
- Efficiency
No court approval is required or mandatory waiting periods observed before trust assets can be distributed to beneficiaries, resulting in savings of time and money. (For reference, the legal fees, disbursements and taxes to obtain a Grant of Probate from the B.C. Supreme Court will usually cost an estate at least $7,500.) A trustee of an Alter Ego Trust or Joint Partner Trust may commence the distribution process soon after the death of the settlor (or the last settlor).
- Incapacity Planning
A settlor of an Alter Ego Trust or Joint Partner Trust usually acts as the trustee of the trust while they are well and able. An alternate trustee can be appointed in the event the original trustee becomes incapable, which functions in place of a Power of Attorney with respect to the assets settled into the trust, which may consist of the settlor’s home and bank accounts.
- Creditor Protection
So long as there has been no fraudulent intent in settling the trust, these trusts may offer some protection from future potential creditors of the estate (other than Canada Revenue Agency). This is because assets transferred to the trust no longer belong to the settlor and do not flow into their estate on death.
- Special Tax Treatment
Assets settled into a trust usually trigger a taxable disposition, meaning the Income Tax Act treats the transfer as a ‘sale’ at fair market value on which the transferor must declare and pay income tax. Transfers of assets into Alter Ego Trusts and Joint Partner Trusts are exempt from this rule and can be transferred on a tax-deferred rollover basis, though there are a few exceptions.
There is also a rule stating that assets in a trust must be declared as disposed of every 21 years, such that income tax on any gains are collected every 21 years. Alter Ego Trusts and Joint Partner Trusts are also exempt from this rule, though tax will ultimately have to be paid on the sale or transfer of the asset or on the death of the original settlor (in the case of an Alter Ego Trust) or the death of the last settlor to die (in the case of a Joint Partner Trust).
The principal residence exemption on a settlor’s home can also be maintained if the home has been transferred into an Alter Ego Trust or a Joint Partner Trust.
How the tax-deferred rollover actually works
The rollover these trusts rely on is not a general trust feature; it comes from a specific provision. Section 73(1.01) of the Income Tax Act allows an individual who is 65 or older and resident in Canada to transfer capital property into an alter ego trust, or into a joint spousal or common-law partner trust, at its adjusted cost base rather than at fair market value. Because the transfer happens at cost, no capital gain is triggered on the way in. The trust terms have to fit the rule: during the settlor’s lifetime, only the settlor (for an alter ego trust) or only the two partners (for a joint partner trust) may receive the income and capital.
The deferral ends at a fixed point set by section 104(4) of the Act. The trust is deemed to dispose of its assets at fair market value on the settlor’s death, or, for a joint partner trust, on the death of the second partner. That deemed disposition is what replaces the ordinary 21-year deemed-disposition rule for these trusts, so gains are not taxed every 21 years, but they are taxed in full when that death occurs. Understanding which event crystallizes the gain, and planning for the tax bill that lands then, is the part that separates a trust that works from one that surprises the family.
The tax trade-offs to weigh before settling one
The deferral comes with real costs on the other side of the ledger. When the deemed disposition happens at death, the resulting gain is taxed inside the trust at the top marginal rate, not at the graduated rates an individual enjoys, and the trust cannot draw on the deceased’s personal tax credits or unused brackets to soften it. Assets that pass through a person’s estate can access graduated rate estate treatment for up to 36 months and can use the capital-loss carryback available to estates under the Act; property that sits in an alter ego or joint partner trust bypasses the estate, so those tools are off the table.
An alter ego trust also gives up the spousal rollover on the settlor’s death. A person who instead held an asset personally could roll it to a surviving spouse and defer the gain until the spouse’s death or sale; assets locked in an alter ego trust cannot use that deferral (a joint partner trust addresses this by carrying the deferral to the second partner’s death, which is often why couples choose it). Add the administrative load, the annual trust returns, and the fact that transferred assets no longer sit in your personal name, and these trusts earn their keep for a specific profile, generally an older person with substantial assets and a real probate or privacy concern, rather than as a default for every estate.
What Are the Costs to Settle and Maintain an Alter Ego Trust or Joint Partner Trust?
The cost to settle an Alter Ego Trust or Joint Partner Trust consists of legal fees and accountant’s fees. The legal fees will vary depending on the time required for a lawyer to advise on the client’s overall estate plan and to draft and prepare the trust deed, which may amount to several thousand dollars. An accountant should be consulted to determine if the plan is viable from an income tax perspective, and will charge some fees for their time. There may be additional legal fees, such as conveyancing fees, and other costs, such as property transfer tax, to transfer and change title to real estate assets.
There will also be ongoing fees to maintain the trust, such as accountant’s fees to file annual trust tax returns, legal fees if advice or services are needed in future, such as to amend the trust, and possibly, trustee’s fees if a third-party is appointed trustee.
There are a number of important legal and tax considerations that necessitate proper legal and tax advice when settling an Alter Ego Trust or Joint Partner Trust. Our estate planning lawyers would be happy to review your circumstances to determine if an Alter Ego Trust/Joint Partner Trust may be recommended and should be explored as part of your estate plan.
We are proud to offer our legal services to the people of Vancouver, Burnaby, New Westminster, Surrey, Coquitlam, Kelowna, and all other surrounding areas.
Frequently Asked Questions
The answers below give general information about British Columbia law. They are not legal advice. For guidance on your own situation, speak with a lawyer.
What is an alter ego trust?
An alter ego trust is a trust you create for yourself during your lifetime, permitted under section 73 of the Income Tax Act for people who are 65 or older. While you are alive, only you can receive the income and capital of the trust. You transfer assets into the trust, and on your death they pass to the beneficiaries you have named. It is used mainly for privacy, continuity, and probate planning.
What is a joint partner trust?
A joint partner trust works like an alter ego trust but is set up for a couple. The person creating it must be 65 or older, and during the couple's lifetimes only the two spouses or common-law partners can receive the income and capital. When the survivor of the two dies, the assets pass to the named beneficiaries. It lets a couple hold assets together with a built-in plan for what happens after both have passed.
Do I have to be a certain age to set one up?
Yes. The settlor, the person creating the trust, must be at least 65 years old for the trust to qualify under section 73 of the Income Tax Act. This age requirement is what allows assets to be transferred into the trust without triggering an immediate capital gains tax. Younger individuals generally cannot use these particular trusts. Other planning tools may suit people under 65.
Can I move assets in without paying tax right away?
In most cases, yes. Qualifying alter ego and joint partner trusts allow you to transfer capital property into the trust at its adjusted cost base, so no capital gain is realized at the time of transfer. The tax is deferred rather than eliminated. A deemed disposition happens later, on your death for an alter ego trust, or on the death of the second partner for a joint partner trust. Reviewing the tax consequences with a professional before transferring is important.
How do these trusts help avoid probate?
Assets held in an alter ego or joint partner trust are owned by the trust, not by you personally, so they do not form part of your estate when you die. Because they are outside the estate, they pass to your beneficiaries without going through probate and without probate fees on those assets. The transfer also stays private, since it does not become part of a court file. For larger estates, the savings and privacy can be meaningful.
What happens to the trust when I die?
On your death, an alter ego trust is treated as having disposed of its assets at fair market value, which can trigger capital gains tax inside the trust. The assets then pass to the beneficiaries you named in the trust document, without probate. For a joint partner trust, this deemed disposition is deferred until the second partner dies. Planning for the tax that arises at that point is part of setting the trust up properly.
What are the drawbacks of an alter ego or joint partner trust?
These trusts cost more to set up and maintain than a simple will, and they need proper administration and record-keeping. Income earned in the trust is generally taxed at the top marginal rate rather than split among family members, and the trust cannot use graduated tax rates. They also are not the right fit for everyone, particularly younger people or smaller estates. Weighing the costs against the probate and privacy benefits is the key decision.
Who should consider one of these trusts?
They tend to suit people 65 or older with substantial assets who want to reduce probate exposure, keep their affairs private, or plan for possible incapacity by naming a trustee to manage the assets. People concerned about a potential challenge to their will sometimes consider them as well, though that carries its own considerations. They are one option among several, and not always the best one. A lawyer can compare them with a straightforward will and other strategies for your circumstances.
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