How to Make an Alter Ego or Joint Partner Trust Work For Your Estate
What is an Alter Ego Trust?
Alter Ego and Joint Partner trusts are two further examples of inter vivos trusts. The value of all assets held in the trust at death are kept outside the probate process, reducing tax payable. Only the Settlor (in the case of an Alter Ego Trust) or the Settlor and Settlor's spouse (in the case of a Joint Partner Trust) can receive income and or capital from the trust assets. These trusts allow for a private distribution of assets on death. Unlike the family trust, there is no deemed disposition every 21 years during the settlor’s lifetime.
These trusts are permitted under the Income Tax Act (Canada) (the "Act"). In the case of the Alter Ego Trust, the client is the Settlor, Trustee and Beneficiary for as long as you are alive. The reason it is called an Alter Ego Trust is because any assets transferred into the trust, or “settled into trust” are no longer held by you personally. Rather, the Trust holds the assets, and the client or “settlor” holds and handles them in the capacity of Trustee, for the Settlor’s own benefit. An Alter Ego Trust operates much like a will in that, while the Trust Deed must state that only the settlor is authorized to benefit from the trust assets during the settlor’s lifetime, the settlor determines who is to receive the trust assets after the settlor’s death, and the assets flow to the beneficiaries without the requirement to pay estate administration tax on the value of those assets.
In order to qualify as an AET and function properly under the rules in the Income Tax Act (the Act), the terms of the trust and the facts concerning the settlor must meet the following criteria:
The trust must be settled by an individual who is at least 65 years of age at the time the trust is created
The individual settling the trust and the trust itself must be resident in Canada, meaning that the trustee(s) and/or other legal representative(s) who exercise management and control over the trust must be resident in Canada;
The settlor must be entitled to receive all of the income generated by the trust during their lifetime; and
No one but the settlor is entitled to receive or otherwise use any of the trust’s income or capital during the settlor’s lifetime.
The goal is to make the intergenerational transfer of wealth more seamless and to give clients peace of mind and control. Ask your Estate Lawyer if an Alter Ego or Joint Partner Trust would be right for you.