- Setup and Qualification:
- The trust is created by an individual (the settlor) who transfers their assets into the trust. According to ITA ss. 73(1.01)–(1.02), this transfer of assets qualifies for a tax rollover, meaning that the transfer does not trigger any immediate tax on the accrued gains of those assets.
- Income and Control:
- The settlor must be entitled to receive all the income generated by the trust during their lifetime. Additionally, they must be the only person who can receive any income or access the capital of the trust until their death.
- Tax Implications:
- While the trust does file its own tax returns and is treated as a separate taxpayer, the rollover treatment under the ITA allows the settlor to defer taxes on any capital gains until the trust assets are eventually sold or the settlor passes away.
- At the settlor’s death, the trust assets are deemed to have been disposed of at their fair market value, which may result in capital gains tax.
- Benefits:
- Better assets and income management:
- As the beneficiary (who is also acting as one of the trustees) gets older, he might find it difficult to manage his assets. With an alter ego trust, if he no longer wishes to manage the assets or become incapacitated during his lifetime, the assets will continue to be managed by his co-trustee or named alternate trustee, in a seamless fashion.
- As the beneficiary (who is also acting as one of the trustees) gets older, he might find it difficult to manage his assets. With an alter ego trust, if he no longer wishes to manage the assets or become incapacitated during his lifetime, the assets will continue to be managed by his co-trustee or named alternate trustee, in a seamless fashion.
- Avoids Probate:
When the settlor of an Alter Ego Trust dies, the distribution of assets to the beneficiaries is governed by the trust document itself, not by the settlor’s will or intestacy rules. An Alter Ego Trust typically includes specific clauses naming the beneficiaries who will inherit the trust assets upon the settlor’s death, along with detailed instructions on how the assets should be distributed. This arrangement allows the assets to bypass the probate process entirely, as the terms of distribution are already established within the trust.
- Privacy:
- Since the assets are transferred outside of the will, this process remains private, unlike the probate process, which is a matter of public record.
- Better assets and income management:
- Disadvantages:
- More expensive upfront legal fee to set up the Alter Ego Trust and more ongoing accounting fee, as the trustees will need to file T3 for the Alter Ego Trust.
- Income retained in the Trust will be taxed at the highest marginal rate
- So basically the trustee needs to make sure all its income has been paid out to the beneficiary each year to minimize the harm.
- Loss of spousal rollover → Inescapable high capital gain tax
- Any capital gains that have accrued on trust assets will be subject to the deemed disposition on beneficiary’s death.
- LCGE no longer applicable
A Joint Partner Trust functions similarly to an Alter Ego Trust but allows both partners to transfer their assets into the trust and receive income from it during their lifetimes, with the surviving partner retaining sole access to income and capital until their death. This trust bypasses probate upon the death of the second partner, ensuring privacy and efficient asset distribution, while also requiring separate tax filings as a distinct taxpayer, with potential capital gains tax on asset disposition when the last surviving partner passes away.
- For couples over 65 years old
- While an alter ego trust is for an individual, a joint partner trust is for both members of a couple, allowing them to manage and control their assets together.
- Set up by spouses/partners:
- Both spouses (or common-law partners) transfer their assets into the trust, so it is same creation procedure as alter ego, BUT for entitlement of both spouses to receive income until death of surviving spouse
- Benefit during lifetime:
- Both can receive income from the trust and use its assets while they are alive.
- Avoids probate:
- After both partners pass away, the assets in the trust go directly to the named beneficiaries, skipping the probate process.
- Tax implications:
- Like the alter ego trust, the joint partner trust is considered a separate taxpayer and has to file its own tax returns. Upon the death of the surviving partner, the trust is deemed to have sold its assets at fair market value, which might lead to capital gains tax.
- Main advantages:
- Same as above Alter Ego Trust
- Main disadvantages:
- Same as above Alter Ego Trust
Important Notice:
This blog series offers readers a basic understanding of the concept of “Trust.” It does not constitute legal advice from our firm. If you encounter any trust-related matters, it is essential to consult your lawyer. As always, it is best to leave professional matters to the professionals.