Alter Ego Trusts

Alter Ego Trusts

Trusts serve an important role for managing and distributing wealth according to your needs and wishes. Depending on the nature of the assets, taxes, beneficiaries, family dynamics, privacy needs, and level of control, there are many types of Trusts that can be utilized to accomplish various goals. This article highlights some of the characteristics of the Alter Ego Trust. By the way, this type of Trust can be held jointly with a spouse, in which case it’s called a Joint Partner Trust.

The Alter Ego Trust is a pretty straight forward Trust utilized for your benefit while you are still alive. It also can provide for instructions to distribute the remaining assets to beneficiaries once you die, effectively by passing the Last Will and Testament. A person can still have a Will in addition to a Trust, but the Will does not need to provide instructions with regards to the assets held within the Trust if taken care of within the Trust document. You can hold residential property, non-registered investment accounts, and other items of value in the Trust. You must be at least 65 years old to set-up this Trust.

Who should consider an Alter Ego Trust?

There are personal and/or financial reasons for this type of Trust.

Financial Reasons.

You financially benefit because you (and spouse) are the only people allowed to benefit from the income and the capital that is derived from the Trust while you are still alive. Unlike other types of Trusts, this one is for your financial use.

Estate Administration Tax (EAT) is levied based on the value of the deceased person’s estate. In Ontario, an estate worth 5 million dollars is charged approximately $75,000. An estate valued at 15 million is charged approximately $225,000. On top of EAT, there is a deemed disposition of all assets, and there may be additional taxes arising from capital gains. Assets held within a Trust are not considered in the calculation of EAT (when done properly) and thus can save thousands of dollars.

Tax Free Roll-in of assets into the Trust is allowable with the Alter Ego allowing you (and spouse) to defer capital gains taxes until the last person dies. Most Trusts must be deemed disposed every 21 years for tax purposes, but the Alter Ego can make an election not to.

Creditor protection is very strong when using Trusts and can be helpful if such a situation like a lawsuit were to arise in the future.

Multi-jurisdictional property can be “centralized” with the Alter Ego Trust which makes it easier for property held in various provinces to administer, especially after death, saving both time and expenses for the newly appointed Trustee.

Principal Residence capital gain exemption is still valid within the Alter Ego Trust.

Personal reasons.

It’s private. There are many reasons families wish to maintain privacy regarding their wealth. Last Wills and Testaments are not private, but assets within a Trust and what is to happen with the assets upon death is private.

It’s very difficult to contest.  Considering Trusts are generally set up when you are of sound mind, they are very difficult to contest and not as simple to change when you get older and are perhaps more vulnerable to coercion.

Can replace Power of Attorney, at least for the property within the Trust. Your designated trustees can take over the administration of the Trust if you become incapacitated, and unlike a regular Power of Attorney which ends upon your death, the Trustee continues with his/her duties outlined within the Trust  after the death.

There is none, to very little, waiting period to distribute assets to beneficiaries upon death as they are not subject to the waiting period of probating a Will.

Trusts can be utilized for many wealth strategies, but like anything else good, Alter Ego Trusts also have some drawbacks to consider.

US Estate Taxes can throw a wrench into the tax consequences of wealthy individuals. Holding US assets in this type of Trust won’t shield an estate from potential taxes in the US as they will “look through” the Trust as if everything was personally owned.

Alter Ego Trusts are taxed at the highest marginal tax rate. In some cases, the tax rate of an individual might also be the highest, in which case this won’t matter as much. However, other cost savings may outweigh a slightly higher tax rate for others.

No other beneficiaries are allowed to benefit from the Trust while you are alive – negating any income splitting opportunities.

Charitable giving upon death from the Alter Ego Trust needs to be carefully weighed regarding the use of the tax credit for donating – whether it will be allowed within the Trust or personal final tax return. Many are of the view it’s best to plan any charitable giving through a different type of Trust or from a direction within the Last Will and Testament.

Existing personal capital loss carry forwards need to be considered prior to transferring assets to the Alter Ego Trust.

The Trust is deemed disposed upon last to die and any taxes owing from this event need to be paid. New rules make the personal estate of the deceased pay these taxes – not the Alter Ego Trust. The Trust goes intact to the beneficiaries, but if there are also assets outside of the Alter Ego meant to go to other beneficiaries, they will have a reduced inheritance due to potential taxes owed from the Alter Ego Trust.

In Conclusion

It is very important to consider the differences between Alter Ego Trusts and other types of Trusts before making a decision, as they are very different animals from each other.  It’s possible to have several Trusts of different types for different purposes.

Financial Planning is a profession where advice in many areas of wealth building, including protecting wealth though proper estate planning strategies can be achieved. The first step is to obtain a financial plan wealth calculation. This helps determine the potential size of your estate, the tax consequences, and to outline the options available that suit your desires.