Canada: Alter Ego And Joint Partner Trusts

Amendments to the Income Tax Act (Canada) in 2001 created specific estate planning opportunities for people who are 65 or older. Since then, the use of alter ego and joint partner trusts has become a central component of many estate plans.

What is a trust?

A "trust" is created when property is transferred by one person (the "settlor") to another (the "trustee") to hold for the benefit of certain persons or charities (the "beneficiaries"). Subject to tax and other considerations, it may be possible for the settlor and the trustee of a trust to be the same person. The settlor may also be a beneficiary of a trust in some instances.

Alter ego trusts

An alter ego trust is a trust created by an individual who is 65 years or older. The terms of the trust must provide that the settlor is entitled to all of the income that arises from the trust property before his or her death, and only the settlor may receive or obtain the use of the income or capital of the trust while the settlor is alive. On the death of the settlor, the trust property that is remaining will be distributed to, or continue to be held for, family m ers, friends or charities as specified in the document creating the trust.

Joint partner trusts

A joint partner trust is similar to an alter ego trust, except that the settlor and his or her spouse, together, must be entitled to receive all of the income of the trust that arises before the death of the survivor of them. In addition, no person, other than the settlor or the settlor's spouse, may be entitled to receive or have the use of the capital of the trust until the settlor and his or her spouse have both died. The definition of spouse, for the purposes of a joint partner trust, includes married, common law and same sex spouses.

What makes these trust special?

Many estate planning objectives can be achieved through the use of a trust established during an individual's lifetime (an "inter vivos trust"), as opposed to one created by a Will. However, a significant obstacle to the use of inter vivos trusts has traditionally been the income tax rules which generally provide that assets transferred to a trust are deemed disposed of for tax purposes at the time of the transfer for proceeds equal to the fair market value of those assets. This means that, if the assets have increased in value while they were owned by the settlor, the transfer of them to the trust could trigger an unwanted tax liability.

If a settlor who is resident in Canada transfers capital assets to an alter ego trust or a joint partner trust, no income tax liability will be triggered by the transfer even if the assets increased in value while the settlor owned them. Accordingly, one of the main obstacles to the use of such a trust by a person who is 65 or older has been eliminated.

Estate planning goals that can be achieved through the use of these trusts



01 Elimination of probate fees

British Columbia has one of the highest probate fee rates in Canada – essentially 1.4 per cent of the value of all estate assets located in British Columbia that pass to the executor or administrator and, if the deceased was ordinarily resident in British Columbia immediately before death, 1.4 per cent of the value of intangible personal property (such as bank account balances, stocks and other securities) wherever located. Assets held through an inter vivos trust will not form part of an estate. Accordingly, probate fees will not be payable in respect of the value of those assets.

02 Incapacity planning

A trust can be used as an alternative to an Enduring Power of Attorney to ensure that an individual's financial affairs will be properly managed should he or she become mentally incapable. When compared to the use of a Power of Attorney in this context, a trust can provide in some circumstances for a more efficient administration of one's assets both during one's life, and after death.

03 Wills variation concerns

The Wills, Estates and Succession Act of British Columbia ("WESA") provides that if an individual dies leaving a Will that does not make "adequate provision" for his or her spouse and children, including adult children, the Court can vary the Will as it considers appropriate in order to do so.

A great deal of litigation is commenced every year based upon this legislation. The related costs can be significant and are often paid out of the estate. Will variation litigation is especially common in situations involving competing interests created by second marriages and blended families, as well as situations where a parent, sometimes for good reason, has treated his or her children differently under his or her Will.

The decisions of the Courts in these cases are often highly fact driven. As a result, it can be difficult to predict whether a particular Will would be upheld if attacked. Under current law, an alter ego trust and a joint partner trust can be used to eliminate the possibility of a wills variation claim under WESA by an adult child.

04 Asset protection

A trust can also be an effective way to protect assets from future family law or creditor concerns of a beneficiary, and in some limited circumstances, of a settlor.

05 Confidentiality

When an individual dies and an application is made to the Court to probate his or her Will, the Will and a list of that individual's assets and liabilities must be filed with the Court. The Will and that list, including values, are available to any member of the public upon request. This is a concern for many people for reasons of privacy and family security. In contrast, an alter ego or joint partner trust document and details of the property held pursuant to its terms, can generally be kept confidential to the general public both before and after death.

06 Simplify estate administration

The use of a trust can facilitate the administration of an estate by avoiding, for example, the time and cost associated with an application to probate an individual's Will. It also allows the administration of assets for the benefit of family members and other intended beneficiaries to proceed more quickly after an individual's death.

07 Reduction in tax on capital gains

Under the Income Tax Act (Canada), on the day that the settlor dies (in the case of an alter ego trust), or on the death of the last to die of the settlor and his or her spouse (in the case of a joint partner trust), the trust will be deemed for tax purposes to have disposed of all of its capital property at fair market value. Any gains in the value of that property will be taxable at that time in the trust at the highest individual marginal income tax rates that are applicable. If the trust is resident in British Columbia, this means it will be taxed based upon British Columbia's rates, which have traditionally been among the highest in Canada. However, if by December 31 of the year of death, the trust is resident in a lower taxing province, the income tax rates of that jurisdiction could apply. To achieve this benefit, the trust can be established in a lower taxing province from the start, or the trust document can be drafted so as to permit the trust to change its residence for tax purposes in the future.

Conclusion



If you or your spouse is 65 years of age or older and would like to consider the possibility of an alter ego or joint partner trust, we would be pleased to talk to you about the estate planning opportunities such a trust might offer.


About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

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Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

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