Introduction
When it comes to estate planning, the common place that people turn to are the Last Will and Testament and Power of Attorney. However, although these documents are great planning tools which can encompass the majority of a testator’s intentions, there are some alternative methods of estate planning which can be used in addition to, or even as a substitute. This memorandum will discuss one alternative in particular, the Alter Ego Trust.
What is an Alter Ego Trust
Our estate lawyers believe that for one to understand an Alter Ego Trust, one must first understand an “Inter-Vivos Trust.” Defined as a trust created during the lifetime of an individual who “settles” assets into the trust, known as the “Settlor,” this type of trust has a duration as determined at the time of the trust’s creation, subject to limitations, and can entail the distribution of assets to the beneficiaries of said trust during or after the Settlors lifetime.
An Alter Ego Trust, created during the lifetime of a Settlor, is an Inter-Vivos Trust, as a result, all Alter Ego Trusts are Inter-Vivos Trusts, however not all Inter-Vivos Trusts are Alter Ego Trusts.
An Alter Ego Trust, as defined pursuant to subsection 248(1) of the Income Tax Act, (R.S.C., 1985, c. 1 (5th Supp.)) has certain requirements as follows:
- must be an inter vivos trust created after 1999;
- must be created by an individual who has attained 65 years of age at the time of the creation of the trust;
- only the individual is entitled to receive all the income and capital of the trust before the individual’s death and no other person could, before the individual’s death, receive or otherwise use any of the income or capital of the trust;
- is a trust that has not elected out of the provisions to be an Alter Ego Trust; and
- the individual and the trustee (the individual who holds the property) must be resident of Canada.
If each of the requirements are met in full, a Settlor (being the individual setting up the Trust) may create an Alter Ego Trust thereby creating a legal relationship between themselves, the Trustee(s) and the Beneficiary(s). Property and Assets thereby transferred to an Alter Ego Trust and are no longer held personally by the Settlor but rather held and managed by the Settlor or Trustee in their capacity as Trustee. The Trust now holds the Property and Assets. However, during the Settlor’s lifetime, they will have full control and access to those Property and Assets placed into the Alter Ego Trust. Further, while the Settlor is the only individual who may access the Income and Capital during their lifetime, on their death the Trust will distribute these assets to any individual the Settlor wishes. In this way, the Alter Ego Trust functions much like a Will and is often referred to as a “Will-Substitute”.
Although an Alter Ego Trust is settled by a single individual, spouses may also utilize a Joint-Spousal Trust or Common-Law Spousal Trust whereby all requirement as noted above must be complete for both spouses to utilize the Income and Capital for both individuals.
Tax Treatments of Alter Ego Trust
A transfer to a typical inter-vivos trust is considered a disposition and as such will trigger tax on any accrued gains. However, as an Alter Ego Trust is not a typical inter-vivos trust it benefits in such that a transfer will not accrue tax as it will be deemed for tax purposes to have occurred on a tax-deferred rollover basis. This benefit is only available if each requirement for an Alter Ego Trust is met and there is no election in the first taxation year of the transfer.
Further, every trust inherently has a 21-year disposition rule, in which 21-years from the date the trust was created the assets are deemed to be disposed for tax purposes on accrued gains. However, this 21-year rule does not apply to Alter Ego Trusts, in which the only deemed disposition of the trust shall occur on the death of the Settlor.
It is important to note however that an Alter Ego Trust requires a yearly accounting to be performed, as any income that is retained in the trust and not paid to the Settlor shall be taxed at the highest marginal rate possible.
Advantages of the Alter Ego Trust
According to our Wills and Estates lawyers, having Property and Assets held within an Alter Ego Trust rather than personally can offer a number of advantages:
1. Probate
As an Alter Ego Trust is held by you or an individual in their capacity as Trustee and therefore not within your name personally, they do not form part of your Estate when you pass away. As such, unlike assets held personally, which require an application for probate passed before a court, anything held within an Alter Ego Trust bypasses the need for probate and can be administered to the Beneficiaries immediately upon the death of the Settlor. Where your estate assets are considerate, the potential savings of having an Alter Ego Trust and bypassing probate fees (approximately 1.4% of the gross value of your estate) can be significant. Further, as there is no need for an application for probate and thus no utilization of a Last Will and Testament, there can be no challenges for a Wills Variation claim.
2. Privacy is Maintained
Proceeding through an application for probate filing is a manner of public record at the probate registry. As such, any individual who wishes to can go to the Courthouse and request to view these documents, which includes the Last Will and Testament as well as all Assets and Liabilities of the deceased. In direct contrast, as the Alter Ego Trust is administered by the Trustee with no need for court interference all information held within the trust remains private.
3. No Delay
As with most cases dealing with the court system, an application for probate is lengthy and costly. Where dealing with probate can mean beneficiaries of an estate may not see any inheritance for up to a year or in some cases several years, a distribution from an Alter Ego Trust can happen immediately upon the Settlors death.
A date of disposition occurs immediately upon the death of the Settlor, upon this date the Trustee shall have the powers to immediately dispose of the Property and Assets of the Alter Ego Trust to the Beneficiaries without involving the courts. Only in the instance where the Settlor is also the Trustee, would there be a delay, as the Beneficiaries would need to replace the Trustee by Trust Deed as specified within the Alter Ego Trust.
4. Less Fees
As previously mentioned, settling an Alter Ego Trust disposes of the need to make an application for probate. As such, although the fees to initially set up the Trust and to continue running the Trust may be high, there will be savings as a result of bypassing probate. These include legal fees in drafting a probate application, to court fees including a 1.4% probate tax fee.
Since these expenses are typically paid for out of your Estate, fewer expenses means that more assets will ultimately be available for your beneficiaries.
5. Alternative to Power of Attorney (“POA”)
A POA for Property is a legal document which gives an individual the authority to act on the grantor’s behalf in the event of the grantor’s incapacity or at the direct request of the grantor. An Alter Ego Trust provides a convenient structure for a POA for Property and all other Assets which have been placed into the Alter Ego Trust. As Settlor, you may name as many alternate Trustees as you may wish who will have full authority under the Alter Ego Trust to manage and deal with any Property or Asset placed into the Alter Ego Trust. As such, the Trust Deed effectively replaces and can be used instead of a POA.
Disadvantages of Alter Ego Trust
Although it sounds like an Alter Ego Trust is a “no-brainer” to be used for estate planning tool purposes, your estate lawyer can tell you that there are also a few drawbacks in utilizing this specific tool as opposed to a Will or POA:
1. Expensive to Set-up/Run
As a more detailed Estate Planning Tool than a Last Will and Testament or a POA the costs to set-up an Alter Ego Trust are much higher. When dealing with numerous pieces of Property and Assets typically individuals will need to seek Accounting advice alongside Legal advice which can quickly jump into a several thousand dollar ordeal. However, in instances of a straightforward Alter Ego Trust legal advice should be sufficient where the cost to set-up will likely range from $1000-$2000.
However, unlike Wills or POA where there is only an up-front fee, an Alter Ego Trust will also require annual tax returns, which may require the assistance of an accountant and therefore additional accounting fees.
2. Income Tax Rate
Any income generated by an Alter Ego Trust, be it from renting out a Property or disposing of certain Assets which has not been paid out to the Settlor and are retained within the Alter Ego Trust will be taxed at the highest possible marginal tax rate. Any capital gains that have accrued on trust assets will be subject to the deemed disposition on your death at the highest possible marginal tax rate (rather than at the graduated rate, if held personally on death) unless any exemptions apply.
Conclusion
In order to properly decide if an Alter Ego Trust is right for you or for you and your spouse, you will need to consider both the advantages and disadvantages relevant to your unique circumstances. You will also need to take into account what your personal priorities are, for instance some individuals top priority is to avoid future estate litigation which makes the Alter Ego Trust an attractive option. In any event a combination of legal and tax advice will held to determine if an Alter Ego Trust is right for you.
For more information, please contact one of our Wills and Estates lawyers located in Coquitlam – Drysdale Bacon McStravick LLP.