When the topic of estate planning comes up, you might immediately think of Wills and perhaps powers of attorney. It is much less likely for individuals to think of alter ego trusts or consider how they might fit into the estate planning equation. But, in certain situations, alter ego trusts and their counterpart for couples, joint partner trusts, can be very effective at satisfying specific planning and succession objectives during your lifetime and beyond.

Alter Ego Trusts for 65+

Since they were first introduced over 20 years ago, alter ego trusts have served as the foundation of many estate plans. They are available for individuals who are 65 years of age or older.

When you set up an alter ego trust, you no longer own the assets personally. Rather, the assets are managed for your benefit through a trust—hence the name alter ego trust. Very specific trust provisions must be included to entitle the settlor of the trust to receive all of the income generated from the trust’s assets before her death. Only the settlor may receive or use the income or capital of the trust while she is alive.

Upon the settlor’s passing, assets held within the trust can either be distributed or continue to be held in trust. After death, those eligible to benefit from the trust assets expands to a range of possible beneficiaries, including family members, friends, and charitable organizations.

Joint Partner Trusts for Couples

A joint partner trust is similar to an alter ego trust except both the settlor and her spouse are entitled to all income generated from the trust’s assets before the death of the surviving spouse. No one other than the settlor and her spouse may receive or use the income or capital of the trust until both have passed away. In this situation, a spouse includes same sex, married and common law relationships.

Special Tax Treatment

Some people are reluctant to create inter vivos trusts because of the tax consequences that may be triggered by a deemed disposition. However, these trusts are eligible for special tax treatment that allows assets to be rolled over into the trust on a tax deferred basis.

Alternatively, assets can be transferred into the trust at fair market value.¹

The Pros of Alter Ego and Joint Partner Trusts

Common estate planning objectives that can be achieved through alter ego and joint partner trusts include:

• Probate proxy and simplified administration.
  Assets held within an alter ego or joint partner trust do not form part of a person’s estate and therefore do not need to be probated on the death of the settlor or surviving spouse. In addition to benefitting from lower probate fees and legal costs, the trust assets will be distributed to the intended beneficiaries quicker than estate assets that go through the probate process.
• Partial incapacity planning.
  The terms of the alter ego or joint partner trust will continue even if the settlor or surviving spouse becomes mentally incapable. And although it is advisable to complete an enduring power of attorney for assets that are held personally, it is not needed for the continued management of the trust’s assets. In cases of diminishing capacity, a settlor or surviving spouse can receive recurring payments from the trust without interruption, the same way they received them before capacity issues appeared.
• Protection against challenges.
  It is not uncommon for family members to challenge a deceased person’s Will or attempt to alter its terms. These challenges often occur when individuals who are not named in a Will believe they are entitled to support or maintenance, or they believe that the terms of a Will do not reflect a deceased person’s intention due to, for example, fraud or undue influence. It is more difficult to challenge an alter ego or joint partner trust that has been operating for a period of time than it is to challenge a Will.
• Maintaining your privacy.
  Probated Wills are public documents, which means anyone can find out what type of assets were transferred, their value, and the names of all beneficiaries. But the terms of alter ego and joint partner trusts remain private upon a settlor or surviving spouse’s death. Details about the terms of the trust and the assets held within it are not available for public consumption.

The Cons of Alter Ego and Joint Partner Trusts

While there are many benefits that come with setting up alter ego and joint partner trusts, there are disadvantages to consider as well.

• Set-up and administrative costs.
  Drafting a trust agreement involves paying fees to lawyers, possibly to trustees depending on who is chosen, and accountants who complete the trust’s tax returns every year.
• Less flexibility.
  Trust assets are managed by the trustee according to the terms set out in a trust agreement. Once a trust is created, it is generally more difficult to change trust terms, including the contingent beneficiaries, than it is to change a Will. As long as an adult is alive and of sound mind, she can amend a Will at any time. This flexibility can be useful when unanticipated financial or personal circumstances arise.

Making Your Decision

Alter ego and joint partner trusts are most popular in provinces with relatively high probate fees, and where assets of significant value are subject to probate. They are also commonly used by individuals who place a high priority on maintaining their privacy, protecting assets from litigation, and providing for the continuous management of property. They may be less suitable in a province with modest probate fees, when the value of the assets to be transferred into a trust are nominal, or when continuing control over the assets is less critical.

As with most estate planning options, the advantages and disadvantages of an alter ego or joint partner trust depend largely on your unique financial profile, personal preferences and priorities. They are both worthy of careful consideration.

 

 

 

 

1. Please note: Considerations such as tax elections, deductions, credits and other issues related to alter ego and joint spousal trusts are outside the scope of this article. Professional guidance on  the tax consequences of this estate planning option is strongly recommended.