My sixty-two year old father was driving us to my brother's wedding in Alberta. I was looking forward from the back seat, engaged in an animated session of Animal, Vegetable, Mineral, while my other brother, sat in the front passenger seat. The trip was uneventful enough, other than the visit from the Grim Reaper.
Without warning, my dad's head and shoulders suddenly slunk down. His head hit the steering wheel and his arms went limp at his side. The little car began to veer into oncoming traffic, but my brother grabbed the steering wheel and straightened us out, waking my dad in the process. It was his heart. He had made no secret of his frequent cardiac troubles.
But Death was only brushing by that day - a hitchhiker. We left him at the side of the roadway. "Not today, thanks very much! We have a wedding to attend."
He looked resolute, unperturbed, even patient there in his black cloak. "Some other time then? But just so's ya know... I'm here."
Life's Latter Days: Alter Ego and Joint Partner Trust - part 2
Definitions/Review:
Alter-Ego Trust: An inter-vevos (living) trust that can be created once you are 65 or older, where the income accrues to you, the settlor.
Settlor: The person who puts his or her assets into the trust.
Joint Partner Trust: The same as the above, only the spouse (or common law partner) also receives the income, and is the first beneficiary if the other spouse passes away.
Assets Allowed in an Alter Ego or Joint Partner Trust:
You can transfer any kind of capital property to an alter ego or joint partner trust, except your RRSP, RRIF, inventory, raw land, goodwill or resource property.
Some of the Advantages of an Alter Ego or Joint Partner Trust:
1. Reduction of Probate Tax
Assets that have been previously transferred to an alter ego or joint partner trust will not form part of the estate assets and therefore are not subject to the probate tax on death.
2. Continuous Management of Your Property on Death
You may be able to minimize the disruption to the management of your assets on death since the trustees of your trust will not need to obtain probate in order to administer the trust assets.
3. Preserve Privacy and Confidentiality
If your will is probated, it will become a public document, viewable by anyone. If privacy is important enough to you, consider transferring your assets to an alter ego or joint partner trust, which will not be subject to public scrutiny.
4. Protection Against Estate Litigation
It is generally more difficult for someone to challenge the validity of a trust than a will.
5. Alternative to a Power of Attorney
It is during the period of declining mental health that we are prone to make unfortunate financial decisions. You can avoid this situation with an alter ego or joint partner trust if you appoint someone other than yourself as the trustee.
6. Asset Protection
A trust can be used to protect your assets from creditors in appropriate circumstances, but this has limits. If the strategy is implemented to hide from creditors, the courts will not uphold it. It is essential that you speak to a qualified legal advisor in this regard.
7. Reduction of OAS Clawback
If you are subject to an Old Age Security (OAS) clawback, a properly structured alter ego or joint partner trust may be able to help you reduce the amount of the clawback.
Some Disadvantages:
1. Cost and Complexity
These trusts can cost several thousand dollars in legal fees to establish, plus ongoing administration costs such as accounting and/or trustee fees. It can also be time consuming for your trustee.
2. Control and Flexibility
You should be aware that once the assets are transferred into the trust, the trustees will assume control of them. You can appoint yourself as the sole or controlling trustee, but if you do, you will lose some of the other benefits.
3. Higher Income Taxes at Death
On death, the trust will have to pay tax at the top marginal tax rate.
4. Charitable Donations
If it is your intention to make charitable donations during your lifetime, you may want to set aside some assets to carry out this intention since the trust will be prohibited from distributing any of its income or capital to anyone other than you or your spouse (in the case of a joint partner trust).
You can designate a charity as a beneficiary of your trust to receive the trust property subsequent to your death, which may qualify you for an immediate donation tax credit.
5. U.S. Persons
The dual taxation regimes could result in double taxation for US persons.
Conclusion:
As you can see, alter ego and joint partner trusts are a powerful tool, which may not be for everyone. This publication is not intended as nor does it constitute tax or legal advice. You should discuss your particular situation with a qualified legal and/or tax advisor to see if these trusts are right for you.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
