Alter Ego and Joint Partner Trusts - two new considerations for estate planning if you're over 65

On June 14th 2001 Bill C- 22 received Royal Assent amending the Income Tax Act S.C. 2001 c.17. That amendment created two new living (inter vivos) trusts-the alter ego trust for individuals and joint partner trusts for a couple.

An alter ego trust is defined under the Income Tax Act as follows:

• The trust must be created after 1999
• The settlor (the person who settles money upon the trust) of the trust must be at least 65 years of age
• The settlor must be entitled to receive all of the income from the trust that arises before his or her death and no person other than the settlor is entitled to receive or otherwise use any of the income or capital of the trust before his or her death.

A joint partner trust is defined under the Income Tax Act as one created by an individual and his or her spouse or common-law partner with the following criteria:

• The trust must be created after 1999
• The settlor of the trust must be at least 65 years of age
• The settlor or the settlor's spouse or common-law partner is, in combination with their spouse, entitled to receive all of the income of the trust that arises before the later of the death of the settlor and the death of the spouse or common-law partner and no other person may, before the later of those deaths, receive or otherwise obtain the use of any of the income or capital of the trust

Tax Treatment

In the case of an alter ego trust the individual must receive all of the income and that income is included in that individuals tax return as though he or she owned it personally.

With respect to a joint partner trust it appears that attribution rules will apply so that, for instance, if a husband transferred property to the joint partner trust, income derived from the property will be included in the husband's income and cannot be split with the wife.

Advantages

The main advantage of establishing either an alter ego or joint partner trust is that the assets transferred to the trust are no longer owned by the settlor and therefore not subject to estate administration taxes (probate fees).

Another advantage is that the settlor can maintain control. The settlor can be the sole trustee during his or her capacity and the spouse can be a successor trustee. The settlor can also revoke the trust or amend it- unless one of the reasons for establishing the trust is to make it irrevocable to avoid influence from others and difficulties on the settlor's incapacity.

A trust, unlike a will, is private. Copies are not reviewed by a court nor filed with a court.

An alter ego or joint partner trust prepared far enough in advance of incapacity will help insulate an estate from the attack of any disgruntled beneficiary.

In the event that a new marriage is contemplated assets contained within the trust are not available to the proposed spouse.

When property is transferred to the trust there is no deemed disposition of capital property and therefore no tax payable at that time. There is no 21 year deemed realization of capital property upon the 21st anniversary of such a trust. Instead there is a deemed disposition of capital property, in the case of an alter ego trust, upon the death of the individual and in the case of a joint partner trust upon the death of the survivor of the partners.

Disadvantages

These trusts do not allow for the use of a testamentary trust after the death of the settlor or joint partners. Thus if monies are to be held in trust for minors, for instance, after the death of the settlor, in the case of an alter ego trust, or of the last partner in a joint partner trust such trusts are inter vivos and not testamentary trusts. Under an inter vivos trust the highest personal tax rate is applicable. Testamentary trusts are subject to graduated tax rates.

For each of these type of trusts a T3 trust information tax return needs to be prepared and filed for each calendar year and there is an obvious cost for that administration.

There may be reporting requirements to the ultimate beneficiaries of the trusts while the settlor and /or their spouse is still alive.

There can be significant problems depending upon the type of assets transferred to the trusts. For instance a trust cannot claim the $500,000 capital gains exemption on the disposition of qualified small-business corporation shares or for qualified farm property. RRSP assets and RRIF's cannot be transferred to the trust and keep their character. Transferring certain assets such as commercial properties or vacant land could attract GST.

Whether an alter ego trust or joint partner trust is right for you is a question for your accountant and your lawyer and yourselves to work out looking to your specific circumstances.

The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.