What are Alter Ego and Joint Partner trusts?

Many Canadians are looking for ways to maximize their estate in hopes of leaving more assets to their loved ones or charities and to ease the administration of their estate once they have passed away.

One option for individuals may be the use of alter ego or joint partner trusts. These are unique trust structures permitted under Canada’s Income Tax Act for Canadian residents aged 65 and older who satisfy certain other criteria under Canada’s Income Tax Act.

The alter ego and the joint partner trusts were introduced in 2001 and have become a popular estate planning tool for high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals looking for alternative options as part of their estate planning strategy.

“When transferring property as an individual to a traditional family trust there’s generally a deemed disposition of the property at fair market value, but the Income Tax Act provides for a transfer at cost for assets rolled into either an alter ego trust or joint partner trust.” says Jag Gandhi, vice-president of wealth planning at Gluskin Sheff.

According to Gandhi, by transferring assets from the individuals name to one of these special types of trusts the assets are no longer part of the individual’s estate. As a result, these assets may be excluded from the probate tax calculation which may have otherwise been required depending on the jurisdiction of the assets or individual. “Depending on the value of the estate, that can be a significant savings,” Gandhi says, adding that such trust structures are most popular in provinces with higher probate fees, such as Ontario and B.C.

How alter ego trusts work

A trust is a structure generally created when assets are transferred by an individual (the settlor) to another individual or group of individuals (the trustee or trustees) to hold and manage the assets for the trusts’ of beneficiaries, which can be individuals and/or organizations such as charities. 

An alter ego trust is a trust set up during an individual’s lifetime (also known as an inter-vivos trust). The individual who is a Canadian resident, 65 years of age or older and satisfies certain other criteria under the Income Tax Act would legally transfer their assets to the alter ego trust. Once the assets are transferred the assets are held and managed by a trustee or trustees and can only be used for the benefit of the individual, and no one else.

“Only the individual who established the trust can receive income from the trust and any encroachment made on the capital of the trust can be made for the benefit of the individual so long as he or she is alive. Nobody else can directly benefit from the trust so long as the individual is alive. Upon the death of the individual, the asset of the trust can be distributed to other individuals or charities according to the individual’s wishes, similar to that of a will” Gandhi explains.

A joint partner trust is similar, except that the rules of the trust apply to both spouses and common-law partners. No other person is entitled to the trust’s income or capital until both have died. Distribution of the assets from the trust to other individuals or charities can only be made once both individuals have passed.

What to consider

Not all assets can be transferred to an alter ego or joint partner trust, Gandhi notes. Registered assets like a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) cannot be transferred and owned by the trust.

In addition, property jointly owned with other family members or friends cannot be transferred into these trusts as well. Therefore, a will is still required in order to capture assets that will not or cannot be transferred into the trust.

Here are some advantages and disadvantages to also consider:

Advantages:

In addition to probate tax savings, a benefit to alter ego and joint partner trusts is they remain private, unlike a will which if the estate requires to be probated, the will becomes a public document in the courts. However, these trusts will be subject to the new trust disclosure reporting requirements coming into effect for 2022 income tax reporting.

Obtaining probate in multiple jurisdictions can become cumbersome when someone passes away, Gandhi says. “However, having one of these trusts structures in place can help streamline the process of transferring property without requiring probate in multiple jurisdictions.”

The trusts can also be used as an alternate to a power of attorney (POA) for property when it comes to incapacity planning.

“When you transfer assets to an alter ego trust or a joint partner trust you can be the trustee or trustees while you have the capacity to act, but the trust deed could outline the appointment of other trustees as successor trustees if capacity became an issue,” Gandhi says. “There can be a more seamless transition of dealing with assets within the trust structure than invoking and relying on a power of attorney for property.”

Another advantage with alter ego and joint partner trusts is that there is no deemed disposition until death. That is unlike most trusts that are subject to the deemed disposition rule, which means capital assets are considered sold every 21 years, generating a taxable event.

Gandhi adds that transferring assets to a trust can also provide potential creditor protection, depending on how the trust is structured and drafted.

Disadvantages:

There can also be some downsides to establishing an alter ego or joint partner trust, which includes the upfront legal costs of establishing the trust and transferring the assets to the trust. Once the trust is established, there are also ongoing maintenance costs for accounting, filing tax returns, and potential trustee fees.

“There needs to be transparency with clients that this is not a cheap exercise as there is an upfront cost for doing the analysis of whether such a structure should be created in the first place before anything is even drafted or transferred” Gandhi says.

Still, she notes that for HNW and UHNW clients, the costs associated with analysing the individual’s situation, and generally setting up the structure, will often be less than the potential of probate tax to be paid by the estate on death,

Another disadvantage is that the assets in the trust cannot be used to donate to charity directly because the donations would benefit others, which is not permitted under the criteria for establishing such types of trust.

“If philanthropy is a big part of an individual’s wealth planning strategy, other planning strategies would need to be explored and incorporated in order to maintain their philanthropic goals while having such trust structure in place,” Gandhi says.

Are these trusts right for you?

Canadians considering an alter ego or joint partner trust should seek the advice of professional advisors to ensure the strategy is worth the time and investment.

“It depends on a person’s objectives; is privacy, minimizing  probate , and/or seamless management and transfer of assets the motiving factors?” Is the strategy warranted knowing the potential upfront and maintenance costs associated and other potential downsides?” Jonathan McMurrich, senior wealth planner at Gluskin Sheff asks. A cost-benefit analysis is required.

“Alter ego trusts and joint partner trusts are tools in the estate planning toolbox, and just because they are there does not mean they are right for everyone” he says. Work with your professional advisors to help determine whether an alter ego or joint partner trust is right for you. McMurrich says “In every situation, we want to understand our client’s unique circumstances and objectives and determine, from there, if one of these types of trust is suitable for them.”