Q: Recently I read about a new type of trust that Canadians over 65 can use, called an alter ego trust. Can you tell us more about it?
A: An alter ego trust is another estate planning tool that is available to Canadians. Income tax changes in 1999 allowed for more favourable treatment of this trust. Trusts are a means by which property is held by one person for the benefit of another. However, unlike other trusts, in an alter ego trust you, the property owner, become the beneficiary.
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You transfer your property to the trust, which pays the income earned from the property to you. But there are several qualifications.
You must be at least 65 and only you, not your children, can receive income from the trust. No one can receive capital (the original property transferred to the trust) until after your death.
If your trust meets these qualifications, then you can transfer property to the trust without paying capital gains tax at the time of the transfer. However, when you die, the trust is deemed to have sold the property and capital gains tax would apply. A trust cannot take advantage of the once-in-a-lifetime $500,000 capital gains exemption for farm property.
Similar to the alter ego trust is the joint partner trust. Both the person who created the trust and his partner can receive income. Only after both die does capital gains come into play.
Creating such a trust requires a number of complex legal, accounting and tax issues. The trust will have to be created, property will have to be transferred to the trust, tax returns and documentation will have to be filed with Canada Customs and Revenue and the appropriate record keeping set up.
Why do it? I confess I have never had anything to do with such a trust and to my knowledge it is not widely used. So I go by what I found in the legal literature.
Such a trust is a means of avoiding probate. Probate can take several months and there will be probate court fees and legal fees. Probate means property is transferred to the executor, who will then deal with the property in accordance with the will. In an alter ego trust, no transfer is required to an executor and on your death the trustee disposes of the property in accordance with the terms you set out. This type of trust allows you to bypass some of the probate procedure. Nevertheless, in most estates I suspect the probate and legal fees will be less than those associated with creating a trust.
A trust protects the estate from challenges under dependant’s relief legislation. In all provinces, dependants who believe they have not been properly provided for can challenge the will. If property is in a trust, there is no will to challenge.
Finally, court files, including probate records, are public documents and can be searched. By avoiding probate, there is no file.
A trust also acts as a form of power of attorney in the event that you are unable to manage your property due to illness. The trustee runs your affairs and continues after your death until your property is disposed of.
Don Purich is a former practising lawyer who is now involved in publishing, teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
