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April 16, 2024

Tax Tips

Alter Ego Trust as a Will Substitute
Subject: Alter Ego Trusts
Number: 10-29
Date: 12/3/2010
such trusts provide for incapacity planning

While an earlier Tax Tip (2010-16) pointed out some of the traps and pitfalls in using an alter ego trust, these trusts can be useful for a variety of planning purposes, including:

  • Probate avoidance
  • Creditor-proofing
  • Confidentiality
  • Incapacity planning
  • Avoiding claims under dependants’ relief legislation, and
  • Jurisdictional tax planning.

Generally to qualify as an alter-ego, joint spousal or joint common-law partner trust, the following criteria must be met:

  • The contributor or settlor must be age 65 or older;
  • The settlor or settlors can be the only individuals entitled to the income of the trust, up to death; and
  • No other person can be entitled to receive income or capital from the trust during the settlor or settlors’ lifetimes.

Where these conditions are met, property can be contributed to a trust on a tax-deferred rollover basis. The 21-year deemed disposition rule does not apply to the capital property held within this type of trust.

Some non tax advantages of creating such a trust include the facts that the trust can serve as a "will substitute" and protect the assets from unscrupulous acts of predators who might attempt to take control of an elderly person’s assets.

The trust might also be structured to avoid probate and the incumbent fees associated with the grant of probate. Confidentiality may also be an important issue and the terms of these trusts are not a matter of public record.

Finally, such trusts provide for incapacity planning, in that the settlor can arrange for a trust company or other personal representative to be appointed as a co-trustee, or as an alternate trustee, should the settlor become incapacitated and unable to act. A degree of tax planning and optimization can also be achieved if the residence of the trust is in a provincial jurisdiction with a lower tax rate than the jurisdiction in which the testator lived.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.