Alter-ego trusts and joint partner trusts are key estate-planning vehicles that allow Canadians to retain control over assets during their lifetime, while ensuring those assets flow outside of the estate upon their death, thus providing a number of estate-planning benefits.
An alter-ego trust is a type of inter vivos or living trust that is created during one’s lifetime, as opposed to a testamentary trust, which is created via a will after one’s death. Only individuals aged 65 and older can be the settlor — or creator — of an alter-ego trust.
Joint partner trusts operate in the same manner as alter-ego trusts, except that joint partner trusts are created by spouses or common-law partners, as long as at least one of the spouses or common-law partners is 65 years or older.
Assets transferred to an alter-ego or joint partner trust do not trigger a deemed disposition at fair market value, creating a tax liability arising on any gain on the disposition, as would be the case for most other types of trusts.
“It allows seniors a little bit more flexibility in their planning in that they can create these trusts, and transfer assets to them, without having to worry about triggering a taxable event,” says Wilmot George, director of tax and estate planning with Mackenzie Financial Corp. in Toronto.
In an alter-ego trust, only the settlor has any entitlement or right to either the capital or any income of that trust during his or her lifetime. Income generated in an alter-ego trust is taxed at the highest marginal rate in the hands of the individual who created the trust. When the individual dies, there is a deemed disposition of the assets inside the trust, and if there has been a gain, a tax liability arises inside the trust.
In a joint partner trust, only the two spouses have access to the capital and income in the trust until the death of the second spouse. As with an alter-ego trust, there is a deemed disposition after the death of the second spouse.
Assets in an alter-ego or joint partner trust pass outside of an estate at the time of a settlor’s death, which provides a number of key advantages, including the ability to avoid the probate process. Avoiding probate means that the assets will not give rise to any probate fees, and confidentiality can be retained on amounts held in trust, as probate is a public process.
This also allows for assets to flow out of the alter-ego trust to beneficiaries without delay, unlike assets within the estate, which may be inaccessible during the application and processing of probate.
In addition, assets held in an alter-ego or joint partner trust offer the individual and his or her beneficiaries some degree of creditor protection, as a trust is more difficult to contest than a will.
Although some individuals could choose to use an alter-ego trust in place of a will, one tax expert suggests that it would be still wise to have a will in addition to an alter-ego trust.
“You still have to have a will if only to deal with any [assets] that might not fall into your alter-ego trust,” says Tim Cestnick, president and CEO of Toronto-based WaterStreet Group Inc.
Up next: Spousal trusts.