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Alter Ego Trusts and Joint Partner Trusts: The Ideal Candidate

Alter Ego Trusts (“AETs”) and Joint Partner Trusts (“JPTs”) are effective tools to assist in probate and incapacity planning. AETs and JPTs are inter vivos trusts (meaning they are set up during a person’s lifetime), to which persons 65 years or older can transfer assets on a tax-deferred basis. An AET is for the exclusive benefit of one person during his or her lifetime and a JPT is for the exclusive benefit of married or common-law partners until the death of the survivor of them.

To qualify as an AET or JPT under the Income Tax Act (Canada), the following conditions must be met:

  1. the trust must have been created after 1999;
  2. the settlor, at the time the trust is created, must be at least 65 years old and resident in Canada;
  3. the settlor in the case of an AET and the settlor and his or her spouse or partner in the case of a JPT must be entitled to receive all of the income earned by the trust during his or her or their lifetimes; and
  4. only the settlor in the case of an AET and the settlor and his or her spouse or partner in the case of a JPT may receive any payments of income or capital of the trust prior to the settlor’s or the settlor’s and his or her spouse’s or partner’s death.

There are many advantages to using AETs and JPTs as well as substitutes, one of which is the avoidance of probate. This includes minimizing exposure to significant Ontario Estate Administration Tax, which is currently levied at 1.5% of the value of an estate subject to probate, reducing professional fees and delays in the probate process, and preserving privacy. AETs and JPTs can also be used as an incapacity planning tool, which would allow for continuity in the management of the settlor’s and his or her spouse’s or partner’s assets. For a comprehensive overview of the uses of AETs and JPTs and their benefits, please refer to our advisory “Alter Ego and Joint Partner Trusts”.

As noted above, one of the benefits of AETs and JPTs is that they remain private documents as opposed to Wills which become public documents once a Certificate of Appointment of Estate Trustee (probate grant) is issued by the Court. Although, with a trust, testamentary intentions and the value of the estate may remain private, starting January 1, 2021, under new trust disclosure and reporting rules, certain information regarding a trust will need to be disclosed to the government, including the name, address, date of birth (if applicable), and tax identification number of the settlor, trustees and beneficiaries of the trust. For more information on the new rules, please refer to our blog “Getting Ready for the New Trust Reporting and Disclosure Rules”.

An AET or JPT should be considered for those who are 65 years or older. The most appropriate clients to use this type of trust planning are clients who are advanced in years, who understand the complexities of the trust, including that income and capital of the trust cannot be used for anyone else’s benefit, including, for example, children, grandchildren or charities, and who own assets of significant enough value to warrant the professional costs of settling and administering the trust.

It may be onerous to set up such a plan at the earlier age of 65 because of the ongoing administration of the trust, including annual tax filings. At 65, someone may also not yet be prepared to give up any control of his or her assets. At a more advanced age, a person may be more prepared and in some cases wish to manage assets with one or more persons, when they feel the need for assistance.

We may see an increased use of AETs and JPTs during COVID-19. With the coronavirus pandemic, we have entered uncharted waters of social distancing where, practically speaking, it is challenging to execute Wills and Power of Attorneys with clients because of the strict formalities provided for under the relevant statutes. The trusts and estates law bar is trying to navigate this situation as best it can and it will be interesting to see how this will evolve over the coming weeks.

Trusts do not require the same signing formalities as Wills and Powers of Attorney. The less strict signing requirements may make trusts more attractive for lawyers and clients during this time in circumstances where trusts are appropriate for clients.

Also, in certain circumstances, an attorney for property may settle an AET on behalf of the person who granted the power of attorney, called the grantor. An attorney may do so if he or she has been expressly granted the power to settle a trust under the grantor’s Continuing Power of Attorney for Property. Ontario case law supports the ability of a grantor to do so provided the dispositive scheme of the grantor’s Will is adhered to. Where a grantor has an estate which would benefit from settling an AET but he or she is not capable of executing a new Will or settling a trust because of physical restraints due to current circumstances or diminished capacity, if the grantor has a Continuing Power of Attorney for Property it may be possible for the grantor’s attorney for property to settle an AET on the grantor’s behalf so long as the AET follows the distributive theme under the grantor’s existing Will.

The benefits of AETs and JPTs need to be weighed against the costs of setting up and administering them and the acceptance of losing some control of assets, among other factors. Given the current climate, AETs and JPTs may be even more attractive in situations which already warranted this type of trust planning. Each individual circumstance is different and experienced legal counsel should be consulted to determine whether an AET or JPT is appropriate in each person’s situation.

– Marly Peikes

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.