Alter ego trusts are a great estate planning tool.
Who can help you
Our BC Lawyers would be happy to help you make an Alter Ego Trust:
Jaime Boyle at Kelowna-Downtown
Daniel K. Lo at Penticton
Keith Martens at Kelowna-Enterprise
For the first time ever, seniors make up a larger share of Canada’s population than children. According to Statistics Canada, this trend will continue to increase. By the year 2031, Stats Canada predicts that nearly one in four Canadians will be over 65. As the population of Canada continues to age, strategic estate planning is becoming more important than ever.
Trusts are one form of estate planning. Estate planners have been provided with a new tax planning tool: the Alter Ego Trust (“AET”). This vehicle offers significant benefits for those who wish to avoid public disclosure, or the probate fees associated with the probate process, which could be a substantial fee depending on your estate value.
In addition, AETs receive special treatment under the Income Tax Act (“ITA”), and receive tax treatments that are more favourable compared to other forms of inter vivos trusts, making AETs a welcomed addition to an individual’s estate planning package.
Features of an Alter Ego Trust
An Alter Ego Trust can be settled by any Canadian resident over the age of 65 (the “settlor”). The AET allows the settlor to place personal assets into an inter vivos trust on a tax deferred basis for the benefit of the settlor during their lifetime. After the settlor has passed, the income and capital may be paid to a beneficiary other than the settlor (for example, a child).
The advantages to these trusts are numerous, including some of the following, which we will discuss in greater depth below:
- Beneficiaries receive their inheritance much sooner,
- Avoiding the need to probate the assets in the trust,
- Saving on paying probate fees,
- Keeping assets private, as the probate process is part of the public record that anyone can review, and
- Sheltering the assets from Wills Variation Claims.
While some other trusts can accomplish these same goals, AETs are special under the Income Tax Act, and receive tax treatment that is very favorable compared to other forms of inter vivos trusts. Specifically, unlike other trusts, in which a transfer of assets to the trust can trigger a gain for income tax purposes, a transfer of assets to an AET is tax-free at the time of transfer. This feature, combined with the ones listed about make the AET an attractive estate planning option.
Avoiding probate
“Probate” is the process of proving a Will in solemn form, protecting the Will from later attack, and is required for most estates. The process itself can be long (in the realm of 3-12 months to get the grant of probate, and then a further 210 days before the executor will be permitted to distribute the assets of the estate). Probate also costs money, at a fee of 1.4% (approximately) of the total net value of the estate, which can be substantial.
Assets held in an AET are not the settlor’s at the time of their death, and consequently don’t form part of the estate. Therefore, they aren’t required to be probated, unlike assets that pass under a will, thus saving the probate fees and the cost of probate. As such, the trust can be distributed to beneficiaries and ‘wound up’ much faster, leading to a quick distribution of the assets.
Minimizing public disclosure of assets
Probate itself is a
public court process, so technically anyone can go down to the court registry and ask to see the multitude of documents which have to be filed for that process, including an individual’s Will and a statement of all their assets. This can be disadvantageous to many people who may wish a greater degree of privacy.
For example, are you passing your shares of a private company to a beneficiary? You probably don’t want them to announce their value to the world, especially if you expect your beneficiary to try to sell them in the future.
AETs avoid all of this by keeping it out of the estate. The trust assets are distributed according to the trust by the appointed trustee and kept private.
Wills variation protection
British Columbia has Canada’s most generous wills variation language in the Wills, Estate and Succession Act (“WESA“). A deceased’s children and spouses may make claims against an estate if they believe that the Will did not adequately provide for them. This is particularly important with second marriages where there may be a higher risk of conflict between the deceased’s children and surviving spouse. If, in the court’s opinion, the Will does not make “adequate provisions for the proper maintenance and support” of those persons, the court may vary the terms of the Will.
The Wills variation provisions are only able to vary Will. Life insurance policies, gifts during your lifetime and distributions by AETs cannot be changed under these rules. Not only does this shield the assets in the trust, but it also decreases the total value of your estate.
Limitations of Alter Ego Trusts
There are limitations on the use of AETs.
For example, in the case of real estate, the transfer of real property to the trust may trigger Property Transfer Tax which would be counteractive to any savings in probate fees for properties over $300,000.00 in value.
Generally, AETs are not revocable like a will, however, there a number of ways to alter the terms of the trust if necessary. Also, where the estate consists of appreciating assets, it is advisable to speak to an accountant to see if the savings on probate fees would be offset by the need to pay capital gains tax on death when the asset is transferred to the beneficiary at the fair market value. The trust does not have personal exemptions available to claim in the year of death, unlike an individual may have. Therefore, we can design an AET for certain assets and use a will for the assets that would not benefit from being transferred into an AET.
Finally, AETs do require a lawyer to set them up, and likely also tax advice from an accountant. They also require their own tax return to be filled every year. These additional costs may add up to more than any probate fee savings, or they may be less depending on your specific circumstances.
AETs are one of many estate planning tools. Do you want protection from a Wills variation claim, to keep your financial matters or beneficiaries private, or reduce probate and filing fees? Or do you have other estate planning goals? We can help design your estate plan to maximize what you find most valuable.
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250) 762-0318 or email Jaime at [email protected].