As more Ontarians seek to protect their wealth, avoid probate, and ensure a smooth transfer of assets, the use of trusts has become increasingly common. Among the most valuable tools for older individuals are the alter ego trust and the joint partner trust. These trusts offer unique tax and estate planning benefits, especially for individuals over 65. Understanding how they work, who they benefit, and how to implement them properly can help ensure long-term financial security and minimize legal complications after death.
What Are Alter Ego and Joint Partner Trusts?
An alter ego trust is an inter vivos trust (created during a person’s lifetime) that allows the settlor (the person who creates the trust) to transfer assets into the trust while retaining full control over them. It is available to individuals 65 or older and is unique because it allows the settlor to be the sole beneficiary during their lifetime.
A joint partner trust functions similarly but is designed for couples. It allows both partners to be beneficiaries of the trust during their lifetimes. It is also only available if at least one of the partners is 65 or older.
The Income Tax Act governs both trusts and requires them to meet specific legal requirements to qualify for the associated tax benefits. The key feature is that the trust becomes irrevocable upon the death of the settlor (or the last surviving partner in a joint partner trust), and the remaining assets are distributed according to the trust terms, not through a will.
Why Consider an Alter Ego or Joint Partner Trust?
One of the primary reasons people in Ontario consider these trusts is to avoid probate. Probate is the legal process of validating a will, and it comes with fees (called Estate Administration Tax in Ontario), delays, and public disclosure of the deceased’s assets. Assets held in an alter ego or joint partner trust do not form part of the probate estate, allowing quicker, private, and more cost-effective administration.
In addition to avoiding probate, these trusts can also:
- Ensure privacy, as the contents of the trust are not part of the public record
- Provide continuity in asset management if the settlor becomes mentally incapable
- Reduce the risk of estate litigation, such as will challenges or dependency claims
- Enable clear and customized distribution of assets after death
Key Legal Requirements and Considerations
The settlor must meet several legal criteria to establish an alter ego or joint partner trust in Ontario. They must be:
- An individual (not a corporation or partnership)
- At least 65 years old at the time the trust is created
- The sole beneficiary of the trust during their lifetime (or together with a partner in the case of a joint partner trust)
The trust must also be irrevocable and specify that no other person can benefit from the trust during the settlor’s lifetime.
It is critical to have a well-drafted trust deed that outlines the trust’s terms, including the trustee’s powers, the distribution scheme after death, and provisions for the appointment of successor trustees. Legal advice is essential to ensure the trust complies with Ontario and federal tax law.
Tax Treatment of Alter Ego and Joint Partner Trusts
One key advantage of these trusts is their favourable tax treatment. Normally, when someone transfers assets to a trust, it triggers a deemed disposition for tax purposes, meaning capital gains tax may be payable. However, alter ego and joint partner trusts benefit from a special rollover rule in the Income Tax Act.
When assets are transferred into one of these trusts, the transfer happens on a rollover basis. This means the transfer does not trigger any immediate capital gains taxes. Instead, taxes are deferred until the death of the settlor (or last surviving partner). At that point, the trust is deemed to dispose of the assets at fair market value and will pay any resulting tax.
The trust is considered a separate taxpayer and must file its own annual tax return. Income generated by the trust during the settlor’s lifetime is typically taxed in the settlor’s hands. Still, after death, the trust pays tax at the highest marginal rate unless it distributes income to beneficiaries.
When to Consider Using These Trusts
Alter ego and joint partner trusts are not appropriate for everyone. They are typically best suited for individuals or couples who:
- Are over the age of 65
- Own significant assets, such as real estate or investment portfolios
- Want to avoid probate and maintain privacy
- Are concerned about potential estate disputes or family conflict
- Have a high net worth and are engaged in comprehensive tax planning
These trusts may also be useful for property owners in multiple jurisdictions. Since the trust owns the property, the settlor may avoid secondary probate processes in other provinces or countries.
Limitations and Potential Downsides
While these trusts offer many benefits, they also have potential drawbacks. Once assets are transferred into the trust, they are no longer personally owned by the settlor. While the settlor retains control as the trustee and lifetime beneficiary, they cannot change their mind and revoke the trust.
This loss of ownership can have implications for asset protection and government benefits. For example, since the assets are not in the settlor’s name, they might not support the settlor in a long-term care facility that charges fees based on personal wealth.
Also, responding to changed circumstances or new information about beneficiaries is difficult because the trust becomes irrevocable at death. If the settlor later wishes to change the distribution plan, amending the trust can be complex and costly.
Additionally, these trusts do not avoid taxes altogether. They defer capital gains taxes until death and may even face higher tax rates if income is retained in the trust post-mortem.
How to Set Up an Alter Ego or Joint Partner Trust in Ontario
The process of setting up an alter ego or joint partner trust involves several steps:
- Initial consultation: Meet with an estate planning lawyer to determine whether a trust suits your situation.
- Asset review: Inventory your assets and identify which should be transferred into the trust.
- Trust drafting: A lawyer will draft the trust deed and supporting documents.
- Asset transfer: Assets must be legally transferred into the trust. This may require updating titles, account registrations, and insurance policies.
- Trustee appointment: You will act as the initial trustee, but it is wise to appoint a successor trustee if you become incapacitated or die.
- Ongoing management: Maintain accurate records, file annual trust tax returns, and ensure compliance with all applicable laws.
Using Alter Ego Trusts to Avoid Probate in Ontario
Alter ego and joint partner trusts are powerful estate planning tools for older Ontarians seeking to avoid probate, maintain control of their assets, and reduce the risk of post-death disputes. While unsuitable for every situation, these trusts offer significant tax and administrative advantages for those who meet the eligibility requirements.
Given the complexity of trust law and tax rules in Ontario, it is essential to seek legal advice before creating such a trust. A lawyer can guide you through the process, tailor the trust to your personal goals, and help integrate it with your broader estate plan. When properly implemented, an alter ego or joint partner trust can provide peace of mind, preserve family harmony, and protect your legacy.
Contact the Experienced Estate Lawyers at Tierney Stauffer LLP or Your Alter Ego Trust
Navigating the complexities of trusts and tax laws is crucial for a successful estate plan. The experienced legal team at Tierney Stauffer LLP is dedicated to helping clients understand if an alter ego or joint partner trust is the right tool to achieve their goals. We provide strategic, client-focused advice to help you preserve your assets and ensure a seamless transfer of wealth, giving you peace of mind for the future. To discuss how a trust can fit into your comprehensive estate strategy, contact us to arrange a confidential consultation by calling 1-888-799-8057 or reaching out online.