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Posted on February 21st 2006 in Legal Articles

Alter Ego and Joint Partner Trusts: Estate Planning Opportunities

Alter Ego and Joint Partner Trusts: Estate Planning Opportunities

Canadians pay plenty of taxes, and as a result we are always on the lookout for ways to reduce the amount we send to Ottawa. One possibility, if you are over 65, is to set up an inter vivos trust, specifically an alter ego or joint partner trust.

What is a Trust?
As we explained in the Spring 2001 edition of Legal Issues, a trust is essentially a right of property held by one person, the trustee, for the benefit of another person, the beneficiary. The person giving up the property is called the settlor or donor. The trustee holds legal title to the property and administers it, while the beneficiary enjoys the fruits of the property (e.g., interest payments).

There are two main types of trusts – testamentary and inter vivos. Most will be familiar with the former since many people will include a testamentary trust in their wills, particularly if they have minor children. An inter vivos or living trust is set up to take effect during the lifetime of the donor.

Alter Ego and Joint Partner Trusts
In 2001, the federal government provided for two new estate planning tools: the alter ego trust and the joint partner trust. Both these tools allow an individual to transfer some or all of his or her property to a trust on a rollover basis, i.e., tax is deferred. The general rule when transferring property to a trust is that it is deemed to have been disposed of at fair market value, thus giving rise to a capital gain.

To set up either of these trusts, you must be over 65, you (alter ego) or you and your spouse (joint partner) must be entitled to receive all of the income of the trust before your death and no one else can receive the capital of the trust before your death.
Some advantages of using these trusts include, the avoidance or minimization of probate taxes, asset protection, particularly if you are in a second marriage, centralized ownership and management, and privacy, since unlike a will, a trust cannot become a public document.

However, there are also disadvantages. This type of trust is subject to the top marginal tax rates, rather than the graduated rates for individuals. And there is no flexibility in choosing a year-end.

Wealth management and estate planning can be a tricky and complex area. In order to decide what is best for your situation, you should speak to a knowledgeable professional. Both Howard Steinberg and Stan Landau have extensive experience in this area and they would be pleased to assist you. 1