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If you are over the age of 65 you may want to consider an Alter Ego Trust (AET) or Joint Partner Trust (JPT) as part of your estate plan.
Creation of an AET or JPT trust involves the transfer of personally held assets to a trust for the benefit of the transferor (and for the benefit of his or her spouse or common-law partner if a JPT).
On the death of the transferor (or on the death of the second spouse to die in the case of a JPT) the assets of the trust transfer to the beneficiaries according to the provisions of the trust deed and do not form part of the deceased’s estate. Thus, AET and JPT trusts are often described as ‘will substitutes’.
To Qualify as an AET or JPT Trust:
- The transferor of property must be at least 65 years old.
- The provisions of the alter ego or joint partner trust must provide that during the lifetime of the transferor (and their spouse if a JPT) only they (and their spouse if a JPT) are entitled to the income of the trust and have access to the capital.
- The transferor must be resident in Canada at the time the AET or JPT trust is settled.
Benefits of an Alter Ego or Joint Partner Trust
Assets with an unrealized capital gain can be transferred to an AET or JPT trust on a tax deferred basis.
Probate fees are not applicable to assets passing though an AET or JPT trust, as they do not form part of an individual’s estate on their death. In British Columbia, BC probate fees are $150 plus 1.4% of the fair market value of all assets in excess of $50,000 passing through an individual’s will; for example, on estate assets with a fair market value of $5,000,000, probate fees would total $69,500.
AET and JPT trusts are private. In contrast to a will, which is provided to all beneficiaries during estate administration and is available to view by the general public; a trust deed remains a private document.
Protection of assets, while not guaranteed, is increased by use of an AET or JPT trust.
It is not uncommon for a family member or common-law partner to make a claim under the Wills Variation Act in BC, if they feel they deserve more than they are bequeathed under a will. Although not always successful, a claim made will result in legal fees and will delay the administration of an Estate.
A JPT trust is often used to provide financial security to a spouse during their lifetime, with the estate assets ultimately passing to secondary beneficiaries as named in the trust deed. For example, a transferor may provide that income from trust assets is to be paid to the surviving spouse during his or her life, and then pass to his or her children from a first marriage after the death of the spouse.
Considerations When Contemplating An AET Trust
Professional fees will be incurred to structure the AET trust and draft the trust deed at the time of settlement, and annual fees will be incurred for preparation of a trust tax filing.
To ensure the assets are properly recognized as assets of the trust and not the estate, title must be transferred. This is not only an inconvenience, but in the case of real property, land transfer tax may be applicable.
With an alter ego trust, there is a loss of flexibility and control over assets; a Will is easier to change than a trust deed.
Consideration must also be given to tax implications, especially if the trust will hold assets such as private company shares or assets outside of Canada if the transferor intends to leave all or a portion of their estate to charities, or the transferor is a US citizen.
Please contact Holly Castle of the Manning Elliott Tax Team if you have any questions about alter ego trusts or joint partner trusts, or for assistance with your estate planning needs.
Holly Castly, CPA, CA, TEP is a Senior Tax Manager and member of Manning Elliott's tax team. Holly's expertise is in providing tax planning advice to privately held businesses, their shareholders and high net worth individuals. To contact Holly, feel free to call her at 604-895-8538 or email her at firstname.lastname@example.org
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.