Planning opportunities with alter ego and joint partner trusts

In 2001, Canada introduced two new trusts: alter ego and joint partner trusts. Essentially, both trusts allow a settlor of an inter vivos trust to transfer capital assets into a trust on a tax-deferred basis if the following conditions are met:

• The settlor is at least 65 at the time the trust is created.
• The trust is created after 1999.
• In the case of an alter ego trust, the settlor must be entitled to receive all trust income that arises before death. In the case of a joint partner trust, the settlor or settlor’s spouse, in combination with one another, are entitled to all trust income that arises prior to the surviving spouse’s death. (All references to a spouse include a common-law partner.)
• No person except the settlor (and the settlor’s spouse, in a joint partner trust) may, before the settlor’s death (or the survivor’s death, in a joint partner trust), receive or otherwise obtain the use of any income or capital of the trust.
• A majority of the trustees must be Canadian.

These trusts have a series of traps or downsides, which were discussed in a previous article. This article discusses some of the planning opportunities these trusts offer.

Probate savings

One of the primary motivators in setting up a trust is to minimize probate fees, which are calculated on the value of estate assets passing through the deceased’s will. Since assets held in an alter ego or joint partner trust aren’t owned by the deceased, they transfer in accordance with the terms of the trust and not through the deceased’s will.

In provinces with higher probate fees, such as Ontario, B.C. and Nova Scotia, the savings can be substantial. For instance, assuming assets held in the trust are valued at $2 million, probate fees paid in these provinces would be $29,500, $27,450 and over $33,200, respectively.

Read: Pay probate or income tax?

Avoiding delay and other probate issues

Another attractive feature of a trust is that, since assets pass outside the estate, the delay and legal formalities associated with a probate application are avoided. As a result, assets are immediately available to the deceased’s family. This is particularly attractive when liquidity is required immediately after death—for instance, where the deceased has a dependant.

Confidentiality and administrative convenience

A trust deed is confidential, as opposed to a probated will, which is a public document. Thus, a client who wishes to maintain confidentiality respecting the distribution of assets may want to consider a trust.

And, since assets are already collected in the trust, estate administration is simplified for the deceased’s personal representative.

Planning for real property in other jurisdictions

There may be procedural advantages when dealing with real property in other provinces, as each jurisdiction has unique succession rules.

Consider, for instance, the wills variation provisions in B.C.’s Wills, Estates and Succession Act. Under these provisions, a court has jurisdiction to alter a will if the deceased’s child or spouse is treated inequitably. The act applies to personal property if the deceased was domiciled in B.C. at the time of death. It also applies to real property in B.C. regardless of where the deceased lived. Therefore, a client with B.C. property may wish to consider creating a trust, as the variation jurisdiction of the court applies only to wills, not trusts.

Power of attorney substitute

The trust deed can provide for a succession of trustees and can therefore be used as a substitute for a financial care power of attorney. The trust deed is usually more detailed and personalized on issues of importance to the settlor than is a power of attorney document. For example, should the settlor become incompetent, the deed can provide for a substitute trustee, and administration can continue. Also, since powers of attorney are provincially regulated, a separate power of attorney may be required in each province where assets are held, whereas a trust is effective in all provinces.

Creditor proofing

Usually, assets passing through a will into the hands of a beneficiary can be seized by creditors. This may not be the case in a trust deed, which, if properly drafted, can provide some protection for beneficiaries.

In the previous article, I discussed some of the disadvantages of an alter ego or joint partner trust. These trusts aren’t a suitable solution for everyone, and the concerns set out in that article should be considered before implementation. However, for the right client in the right circumstances, these trusts can prove beneficial.

Also read:

Let clients know about these will restrictions

Estate planning for a client’s digital assets

Keith Masterman

Tax & Estate

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. He can be reached at kmasterm@ci.com.