Alter Ego Trusts and Joint Partner Trusts: Important Estate Planning Tools for Individuals Aged 65 Years or Older

Article by Heather Hisey and David Steele

An important estate planning tool is available to taxpayers aged 65 years or older. The Income Tax Act (Canada) permits these taxpayers to transfer property before their death to one of two types of trusts (alter ego trusts and joint partner trusts) without triggering any immediate income taxes.

A significant benefit of the use of these trusts is the potential to avoid provincial estate administration tax (or probate fees, as they were formerly and more commonly known). Property held in a lifetime, or inter vivos, trust is not subject to probate fees because, for probate purposes, the property belongs to the trust and not to the deceased's estate.

Other benefits that may result from the use of these trusts include

• avoiding the delays of the probate process,
• achieving a higher degree of confidentiality than is available under the probate process, and
• having an alternative to the power of attorney as a means of protecting or ensuring continuing management of the property of elders.

Income Tax Treatment of Alter Ego Trusts and Joint Partner Trusts

A transfer of property to a trust generally gives rise to a disposition, at fair market value, for income tax purposes. However, a transfer of property by an individual to an alter ego trust or joint partner trust will have no immediate income tax consequences. Rather, the transfer will occur on a rollover (tax-deferred) basis—the trust will be treated as having acquired the transferred property for proceeds equal to the transferor's historical cost in the property. For an alter ego trust, the deferral ends when the individual who created the trust dies. At that time, the trust will be deemed to have sold the trust property for proceeds equal to its fair market value. In the case of a joint partner trust, this deemed disposition will occur when both the creator of the trust and his or her spouse or common law partner have died. In either case, if the deemed disposition gives rise to capital gains, the gains will be taxable in the trust.

Requirements for Establishing an Alter Ego Trust or a Joint Partner Trust

To establish an alter ego trust, the taxpayer who transfers property to the trust must be

• 65 years old or older,
• entitled to receive all the income of the trust before death, and
• the only person entitled to receive income or capital of the trust before death.

For a joint partner trust, similar requirements apply to both the taxpayer and the taxpayer's spouse or common law partner for the period that ends at the death of the survivor. During their lives, the taxpayer and the taxpayer's spouse or common law partner must be

• entitled to receive all the income of the trust, and
• the only persons entitled to receive the income or capital of the trust.

As in the case of an alter ego trust, the taxpayer who creates a joint partner trust must be aged 65 years or older at the time of creating the trust.

These trusts are useful tools to assist in estate and tax planning for taxpayers aged 65 years or older.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.