Alter Ego and Joint Partner Trusts

WHAT ARE THEY?

Alter ego and joint partner trusts are estate planning options available as a result of amendments to the Income Tax Act in June 2001 (retroactive to January 2000). Essentially, they are trusts which are exempt from some of the adverse tax consequences usually associated with trusts created in your lifetime. The advantage to using one or more of them is that the trust property does not form part of the settlor’s estate. Instead, the trustees hold the trust property for the benefit of the beneficiaries named in the trust deed.

An alter ego trust is used where the settlor (the person creating the trust) is to be the only beneficiary during his or her lifetime. A joint partner trust is used where the settlor and the settlor’s spouse are to be the only beneficiaries during their lifetimes.

Because they are creatures of statute, there are some restrictions in using such trusts. In particular:

• The settlor must be a Canadian resident and over the age of 65
• In a joint partner trust, the settlor’s spouse must also be a Canadian resident
• In an alter ego trust, only the settlor is entitled to income
• In a joint partner trust, only the settlor and the settlor’s spouse are entitled to income
• Although the settlor (and in a joint partner trust, the settlor’s spouse) is not required to have a capital interest, the trust property cannot be used for the benefit of anyone but the settlor (and his or her spouse)

WHEN TO USE

When you are considering using an alter ego or joint partner trust, you should be aware of the tax rules relating to them. While a transfer of assets to the trustees of an alter ego or joint partner trust does not trigger a disposition for tax purposes (unless an election is made to do so), there will still be a deemed disposition of the trust assets at the date of the settlor’s death (or the death of the second to die of the settlor and the settlor’s spouse). Any capital gains will be taxed within the trust, at the highest marginal tax rate for individuals. This may (but does not necessarily) result in a higher tax liability at death than would have been payable if the assets were still owned by you personally. You should note as well that a tax credit may not be available for charitable gifts of trust property made after death.

The following circumstances, or combination of circumstances, may justify the use of alter ego or joint partner trusts:

• Where you have a high net worth
• Where you have non-appreciating capital assets
• Where you wish to avoid claims under the wills variation claims under the Wills, Estates and Succession Act
• Where you wish to have privacy in your estate plan
• Where you wish to incorporate incapacity planning into an estate

OTHER CONSIDERATIONS

Where you wish to transfer land to an alter ego or joint partner trust, property transfer taxes may be payable. There are a number of techniques to avoid or defer the payment of such taxes which can be explored.

Although probate fees will be avoided on assets held in the trust, there will be costs incurred in settling it, and if replacement trustees assume duties during the settlor’s lifetime, trustee fees may be payable.

Registered retirement savings plans and registered income funds cannot be transferred to the alter ego or joint partner trust (although the trustees can be designated as the beneficiary of the proceeds of such plans).