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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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The information on this website is for general information purposes only. Nothing on this site should be considered legal, financial, tax, medical, or any other professional advice.