Potential disadvantages of using alter ego and joint partner trusts include the following:
- Yearly tax returns may need to be filed for the trust; and
- There may be a problem with double taxation if an estate is subject to US estate tax. Canadian tax authorities may see the trust and the individual as separate taxpayers, but US tax authorities may disregard the trust and deem it to constitute part of the estate. If this occurs, the trust may be taxed twice – once in Canada and once in the US.
Potential advantages of using alter ego and joint partner trusts include the following:
- The person or persons who make the trust can designate who they want to receive the trust property upon their death but, unlike a will, the trust property will not go through the probate process and the trust document will not normally become public;
- Funds can be more readily available to beneficiaries upon the death of the person or persons who made the trust, because using trusts can avoid estate administration delays;
- Trusts are generally less susceptible to challenges brought by persons who are not involved in the trust, its management, or its administration; and
- In some cases, creditors may be avoided by using a trust.
Two types of inter vivos trusts exist in Canada which allow people aged 65 and older to transfer property to a trust without paying taxes on capital gains. These two types of trusts are alter ego trusts and joint partner trusts.
Alter ego trusts – Alter ego trusts are established during the lifetime of the person making the trust. A person can transfer assets, including assets that have increased in value, to an alter ego trust without paying capital gain taxes at the time of the transfer.
An alter ego trust can be made if the following three conditions are met:
- The person making the trust is at least 65 years old;
- Only the person making the trust is entitled to receive income from the trust during their lifetime; and
- Only the person making the trust is entitled to access the capital of the trust during their lifetime.
As these conditions suggest, alter ego trusts are established by single individuals. Property can be moved into alter ego trusts with the taxes being deferred. When the person who made the trust dies, the property is deemed to have been disposed of for tax purposes.
Joint partner trusts – Joint partner trusts are like alter ego trusts, but they are established during a couple’s lifetime. With joint partner trusts, both partners in the couple are entitled to the trust’s yearly income, and only partners in the couple are entitled to access the trust’s capital during their lifetimes. As with an alter ego trust, taxes on trust property are deferred until death, but in the case of a joint partner trust, taxes are deferred until the death of the final survivor.
Inter vivos trusts are typically established by carefully-drafted documents which set out the terms and conditions necessary for directing how the trust will operate, what property will be held in the trust, who will hold the property and act as trustee, how long will the property be held, and who will be the beneficiary (or beneficiaries) of the trust.
When property is transferred to a trust it is generally deemed, for tax purposes, to have been disposed of at fair market value. Capital gains taxes may therefore be levied against any increase in the property’s value when the property is transferred to the trust.
Inter vivos trusts are flexible in how they can be used to address different issues. Before establishing an inter vivos trust, you should carefully consider your goal or goals. Because the creation, management, and administration of trusts can be complex, we recommended that anyone who is interested in using an inter vivos trust consult a lawyer.
A will is the key document in estate planning, but an inter vivos trust can also be useful. Inter vivos trusts can be confidential, flexible, and ensure that trust property falls outside of an estate. Generally, property that falls outside of an estate is exempt from probate fees and cannot be claimed by anyone who is not the intended beneficiary. In this way, an inter vivos trust can be used to protect property that one person intends to give to someone else.
An inter vivos trust is a trust that operates during the lifetime of the person who establishes the trust (unlike a testamentary trust, which operates after the person who established the trust has died). It is a way to establish a trust that will start working right away, rather than only coming into effect after the person establishing the trust has passed away.
Yes. Testamentary trusts can provide tax saving benefits in addition to helping with estate planning. Testamentary trusts are taxed separately from individuals and can therefore provide beneficiaries with a way to split income. Because the creation, management, and administration of trusts can be complex, it is recommended that anyone who is interested in using a trust consult with a lawyer.
Minor Children – Parents of minor children often establish testamentary trusts for minor children who cannot hold and manage assets. A testamentary trust for a minor child can be arranged so that the child will not receive the full value of their inheritance until adulthood. Such a testamentary trust can be arranged so that the child will receive their inheritance in stages – for example, the trust can be arranged so that the child will receive 50% of their inheritance when they reach adulthood and then the other 50% when they reach the age of twenty-five. Trustees of such trusts are typically authorized to distribute money at any time for different reasons such as to provide for any education or health care needs that the child may have. Trustees can be authorized either to pay only income made on the trust or to also pay out the capital making up the trust.
Beneficiaries with Disabilities – Persons making wills may establish testamentary trusts for beneficiaries with disabilities. Trustees of such trusts are typically given absolute discretion as to how much they distribute to the beneficiary so as to maximize any government disability benefits that are received by the beneficiary.
Spouses – Persons making wills may establish spousal trusts if their estate is expected to be large, there are children from a previous marriage, or the would-be beneficiary spouse is sick, incapacitated, or otherwise unable to adequately manage finances. This kind of trust can provide income from a deceased spouse’s estate to a surviving spouse until the surviving spouse dies, at which point the trust property can be distributed to other beneficiaries.
As with the rest of the contents of a will, the terms of a testamentary trust can be kept confidential. However, if the maker of the will dies and someone then takes the will to court to get an order allowing the executor to execute the provisions of the will, then the will becomes a public document. The contents of the will and the terms of any testamentary trusts therein will therefore also become public.
A testamentary trust is a trust that is created in a will and comes into effect when the maker of the will dies. People establish testamentary trusts for many reasons and to achieve different estate planning goals. In particular, testamentary trusts can be used to preserve wealth and manage property for beneficiaries.
A trust is a legal arrangement whereby someone (called a “trustee”) holds assets (called “trust property”) which they are to manage and distribute for the benefit of another person (called a “beneficiary”).
For example, if a parent gives money to a trustee who is to hold and manage the money for minor children until adulthood, then the money is said to be held “in trust” by the trustee for the benefit of the children.
