The Use of an Alter Ego Trusts or a Joint Spousal Trust as an Estate Planning Tool
When formulating an estate plan, a person should consider their optimal strategy to protect their assets, manage their wealth while they are living, and hopefully, a seamless transfer of their wealth to their beneficiaries on their passing. The use of an alter ego trust or a joint spousal trust may provide a considerable benefit to a person in optimizing their estate planning objectives.
Any reference to a spouse for the purpose of this blog post includes a common law partner.
What is an Alter Ego Trust and a Joint Spousal Trust?
As part of a person’s overall estate plan, an alter ego trust or a joint spousal trust is used to hold an individual’s assets during their lifetime, and during the lifetime of their spouse (joint spousal trust only).
An alter ego trust is a trust created by an individual who is 65 years of age or older for their own benefit. The terms of the trust provide for the person to receive all the income of the trust prior to their passing, and while they are living, no other person can receive or obtain the use of any of the trust’s income or capital.
A joint spousal trust is similar to an alter ego trust, but it is created for the benefit of the individual and their spouse. Only one spouse needs to be age 65 or older, but if the other spouse is under age 65, they will not be able to contribute property to this trust. The terms of the trust provide for the individual and their spouse to receive all the income of the trust prior to their passings, and while the individual and/or their spouse are living, no other person can receive or obtain the use of any of the trust’s income or capital.
For both an alter ego trust and a joint spousal trust, the primary beneficiary(ies) refers to the individual who created the trust, and their spouse (for a joint spousal trust only).
Benefits of an Alter Ego Trust and a Joint Spousal Trust
By creating an alter ego trust or a joint spousal trust as part of a person’s overall estate plan, the following key benefits can be realized:
- Tax-deferred Transfer of Assets – Unlike other personal trusts (i.e., a family trust), assets can be transferred by a settlor to an alter ego trust or a joint spousal trust on a tax-deferred basis. As a result, tax can be deferred until the assets are ultimately sold or until the passing of the last primary beneficiary. It is important to note that on the passing of the last primary beneficiary, there will be a resulting deemed disposition of the assets held by the trust, and the trust will become liable for the income tax on any accrued capital gains, net of capital losses, resulting from this deemed disposition.
- Avoidance of Probate – Probate fees must be paid based on the value of a deceased person’s estate at the time of their passing. Generally, in BC, probate fees are 1.4% of the value of the estate. Assets that are held through an alter ego trust or a joint spousal trust are held separately from a person’s estate for probate purposes, meaning probate fees are not applied to these assets when a primary beneficiary passes away.
Confidentiality – when a will is probated, it becomes a public document. As an alter ego trust and a joint spousal trust is not subject to probate when a primary beneficiary passes away, the trust agreement and the trust’s underlying assets remain private. - Concerns related to wills variation – The assets held in an alter ego trust or a joint spousal trust may be protected against certain types of litigation, the most critical being claims against the validity of an individual’s will and claims under the Wills, Estates and Succession Act of British Columbia. This supports the assets of the trust being distributed in accordance with the individual’s wishes, when the last primary beneficiary passes.
Considerations When Using an Alter Ego Trust or a Joint Spousal Trust
Before creating an alter ego trust or a joint spousal trust as part of an estate plan, the following key items should be considered:
- Donations – An alter ego trust and a joint spousal trust cannot distribute any income or capital to anyone other than the primary beneficiaries. Accordingly, these trusts cannot make charitable contributions during the lifetime of a primary beneficiary. The trust may be eligible to claim a donation tax credit following the death of the last primary beneficiary, however charitable contributions through an alter ego trust or a joint spousal trust are more limited when compared to donations provided for in a will.
- US Tax – US citizens who are resident in Canada may have additional US reporting requirements and cross-border implications to consider when they undertake tax planning in Canada. To ensure an estate plan is optimal from both a US and Canadian tax perspective, professional advice should be obtained early on.
Reach out to one of Smythe’s estate planning experts today to discuss how the use of an alter ego trust or a joint spousal trust can be of benefit to your overall estate plan.
