Canada: Alter Ego And Joint Partner Trusts: Where Do They Fit?

Last Updated: October 18 2018
Article by Margaret R. O'Sullivan


There are a number of real and perceived advantages to using an alter ego or joint partner trust as a will and power of attorney substitute. As well, several important tax and legal considerations must be counter-balanced against the benefits of using a trust. Each client situation is, of course, unique. The challenge is in the careful evaluation of those situations in which an alter ego trust or joint partner trust may be appropriate, which involves a sophisticated understanding of a host of applicable legal and tax considerations and a clear understanding of the client's objectives.

This is the first of two articles focused on the legal and tax attributes of alter ego and joint partner trusts. This article will provide an overview of possible uses of these types of trusts as substitutes for wills and powers of attorney in estate and succession planning for those aged 65 and older. The second article will focus primarily on the tax attributes of these trusts and how the tax rules can influence the use and application of these trusts in planning situations. It will also discuss specific insurance applications within trust arrangements.

Trusts as Will Substitutes (a) Introduction

Alter ego and joint partner trusts are often used as "will substitutes," i.e. as an alternative to a will, or in combination with a will and other vehicles to dispose of property on death.

Most individuals control disposition of their property on death primarily by use of a will, If they do not do so, and do not have any other vehicle or instrument in place, provincial laws of intestacy and other statutory law will dictate distribution and administration of the estate.

Other common methods by which property is distributed on death include joint tenancies with right of survivorship and beneficiary designations under insurance policies, pension plans, annuities, registered retirement savings plans or similar plans.

One of the great perceived benefits of the use of a will is its "ambulatory" nature whereby it does not take effect until the death of the testator and can be changed at any time. In addition, if properly drawn, a will can comprehensively dispose of all of one's property on death and is generally prepared at a reasonable fee level.

However, with the high costs involved in probating a will in certain provinces, over the last decade a greater interest in the use of a trust as a will substitute has evolved, together with a growing appreciation that many of the benefits provided by a will are also available by way of a well drawn trust.1 As well, a trust offers many additional benefits as an estate planning vehicle, which in certain client situations makes it superior to a will, in particular in the elder client context.

(b) Avoidance of Probate

(i) Probate Fee Minimization

Probate fees and estate administration taxes (collectively "probate fees") vary widely from province to province. ln provinces with significant probate fees, such as Ontario and British Columbia, avoiding these fees where appropriate has become a key component of wealth planning.2 In these provinces, to circumvent the need for probate and probate fees, attention has been increasingly focused on methods of transferring property on death which do not require probate, including under a trust agreement.

While a will comes into force only upon death, a trust comes into immediate effect once fully constituted and can deal with disposition of property both during one's lifetime and upon death. Property held by the trust passes entirely outside of the estate and is distributed on death in accordance with the terms of the trust instrument. If properly structured, a trust can provide significant continued control and ownership to the party settling the trust.

The possible use of an alter ego or joint partner trust primarily for the purpose of minimization of probate fees is a worthwhile planning consideration, particularly for elder clients. It may be particularly appropriate for those of very advanced years, where the anticipated administration costs of maintaining a trust and filing tax return may not be as prohibitive because anticipated life span is shorter. It might also be appropriate if the tax planning opportunities otherwise arising on death under current rules do not have application (for example, if the plan of distribution does not involve the use of testamentary trusts for purposes of utilizing graduated tax rates available to testamentary trusts and other opportunities identified in the second article), or where the benefit of such rules might be achieved by using a trust in tandem with a will and testamentary trusts.

(ii)Avoidance of Delay in the Probate Process

Another benefit of using an alter ego or joint partner trust is that delays experienced in the probate of a will are thereby eliminated. The court process to admit a will to probate can be onerous.3 The requirement in certain provinces to serve all beneficiaries under a will with a copy of the will or an excerpt of their bequest or legacy can result in additional delays if beneficiaries cannot be located. In addition, with increased government cutbacks there has been a general decline in the service level in various provincial court systems, and an increased burden placed on the applicant for a Certificate of Appointment of Estate Trustee or Letters Probate or equivalent in terms of the preparation of court material and documents. As a result, receipt of a court order may take several weeks. These delays, as well as the administrative burdens and costs involved in preparing a court application, are circumvented if an alter ego or joint partner trust is used. On death, title to the assets of the deceased will already be in the name of the trustees. The death of the settlor of the trust can result in little or no impact on the ongoing administration of the trust.

(iii) Avoidance of Multiple Probate Proceedings

Another important application of the alter ego and joint partner trust as a will substitute is in respect of clients who have assets, in particular real estate, located in multiple jurisdictions. Under common law conflicts of laws rules governing succession to property on death, the law of the place where real estate is situated, also known as the lex situs, will generally control succession to such property on death. As a result, it is usually necessary to apply to admit a foreign will to probate in each jurisdiction where real estate is situated in order that the legal personal representative will have authority to deal with the assets in that jurisdiction. Needless to say, this process can be an extremely expensive, arduous and complicated one involving the need to liaise with local counsel and to interface with the foreign court process to deal with the assets in the foreign jurisdiction.

If title to real estate is held in the name of trustees under an alter ego or joint partner trust, on death of the settlor, there will be no need to submit a will to probate in the foreign jurisdiction because the property will not form part of the settlor's estate. As a result, the administration of real estate is expedited and with the potential for significant savings, including the payment of local court and professional fees in order to secure probate in the foreign jurisdiction. For example, in some jurisdictions, legal fees for securing probate are established by tariff based on the value of the assets for which probate is being secured, which can be expensive if the assets are of significant value. It should be noted, however, that most civil law jurisdictions do not recognize the trust concept and accordingly the use of a trust in such jurisdictions is generally not advisable.

(iv) Increased Flexibility in Choice of Trustees

Use of an alter ego or joint partner trust also provides additional flexibility in the choice of trustees, in particular for the client who has assets in multiple jurisdictions.

Under local court rules, special requirements often exist before a foreign personal representative can qualify to receive a grant of local probate, and in some jurisdictions foreign individuals are not eligible to act. There are often bonding requirements for foreign personal representatives. Securing a bond is sometimes impossible, depending on the financial worthiness of the applicant. If available, a bond is expensive since the cost of the bond is based on a percentage of the value of the assets of the estate for which probate is sought. As well, securing a bond is a time consuming and lengthy process. In will planning, the choice of executors and trustees is often circumscribed because of the problems which might be encountered in attempting to have the testator's preferred choice of executors and trustees qualify in a foreign jurisdiction. In some Canadian provinces, there are restrictions on who can qualify as an executor or administrator based on place of residence, and there may be requirements for executors who are resident outside the province to post a bond to secure the performance of their duties.4 Qualifying for and paying for such a bond may be prohibitively challenging and costly. Where such restrictions and requirements are in place, the issue commonly arises with regard to trying to qualify a U.S. resident executor. Such constraints do not apply if a trust is used because there will be no need to interface with the local court process on death of the deceased.

(v) Simplification of Estate Administration and Continuity of Management

To the extent that the deceased's assets have been transferred during the deceased's lifetime to a trust, the marshalling of assets and transfer of title to personal representatives, which normally forms a significant part of the estate administration process, has already been accomplished. It is also likely more easily and expeditiously achieved during one's lifetime as owner than can ever be accomplished by one's personal representative after death. Personal representatives must establish their authority to deal with estate assets and must satisfy the unique compliance requirements of each financial institution or transfer authority to effect transfer of property from a deceased person. These compliance requirements are often not well understood or applied by financial institution personnel. The process of establishing authority by the personal representative in order to deal with the deceased's assets and to affect a transfer of title is often fraught with significant paperwork, delay and expense.

Establishment of a trust may also force one to "put one's house in order" prior to death, and to create and organize a comprehensive record of all assets for purposes of effecting transfer to the trustees of the trust, thereby minimizing the risk of lost assets and incomplete information. This re-organization of assets significantly curtails the often laborious and frustrating process experienced by family members, third parties and professional advisors, often with no background or ties to the deceased or familiarity with his or her financial affairs, of attempting to reconstruct a person's affairs after they have died.

Because the trust instrument does not need to be submitted to a formal probate proceeding, an alter ego or joint partner trust also provides for greater continuity in management and administration of the assets of a deceased person. ln contrast, until a court grant of probate or equivalent is obtained, most assets are virtually frozen prior to the estate trustee being in a position to establish to third parties his or her authority to deal with the deceased's assets. Continuity and a smooth transition on death can be very advantageous, particularly for clients who own complicated assets, including an active business, where minimal disruption to the business will be critical.

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Margaret R. O'Sullivan
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