ALTER EGO TRUSTS AND JOINT PARTNER TRUSTS

By GEORGE L. CRAIG , Real Estate, Wills & Estate Law Department

Recently the federal government introduced legislation permitting assets to be transferred during lifetime to an Alter Ego Trust for the donor or to a Joint Partner Trust for the donor and spouse. Initial interest evolved because of the avoidance of probate tax but caution should be exercised. Probate tax is roughly 1.5% of the value of the estate but other factors including annual income tax savings may outweigh the cost of probate tax!
A transfer of property to an Alter Ego Trusts or a Joint Partner Trust will not constitute a disposition for tax purposes. Further, these trusts may avoid the deemed disposition rule after 21 years, so that taxation of capital gains may be deferred longer; generally until the death of the Transferor, in the case of the alter ego trust, or the death of the last to die of the Joint Partners, in the case of the joint partner trust.

The trusts can only be established for individuals who are 65 years old or over and the trust must provide that no person other than the individual, in the case of an alter ego trust, and/or their spouse, in the case of a joint partner trust, can be entitled to the income or capital during the lifetime of the “alter ego” or “joint partners”.

There are a number of advantages to these trusts.

Advantages

1. For the assets in the trust a Will is unnecessary.
2. Probate tax is avoided on the assets in the trust.
3. Unlike a Will these trusts improve confidentiality as they do not become public documents.
4. The trust may replace the Property Power of Attorney to the extent that assets are managed in the trust.
5. Creditor proofing may be obtained.

Drawbacks

1. Testamentary Trusts – The preferential treatment given to testamentary trusts (i.e. graduated rates of tax) will be unavailable for these trusts.
2. Charitable Donations - There will be no opportunity to take advantage of the enhanced deduction limit for donations made by the “trust” which would otherwise be to the extent of 100% of income in the year of death and the immediately preceding year, for an individual.
3. Taxation – As an inter vivos trust, the tax on capital gains, deemed to be realized in the trust, upon the death of the settlor(s), will be taxed at the highest marginal rate, rather than the graduated rates applicable to individuals. (The trust assets of an alter ego trust are deemed to be disposed of at fair market value upon the date of death of the taxpayer. Similarly the assets of a Joint Partner Trust are deemed disposed of upon the death of the surviving spouse.)
4. After Acquired Property – It is unclear that the trust may include property acquired after the trust is established and therefore an individual will need a Will, in any event.
5. RRSPs and RRIFs can not form part of the trust. Stand-alone designations may be required if a complex designation is desired. Trust terms for these are often found in a Will.
6. Amendments – It is not uncommon for individuals to amend a Will on many occasions. Flexibility to dispose of assets in whatever manner they prefer are apt to be more easily changed by will than by amending an alter ego or joint partner trust. Amending the trust will generally be more complex and costly.

While these relatively new trusts are attractive, especially with respect to avoidance of probate tax, individuals should be cautious in arbitrarily using one of these inter vivos trusts without careful review of other Estate Planning opportunities.

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The above is not intended to constitute legal advice. Please contact a lawyer to clarify your legal rights.