Alter Ego Trusts

Estates & Trusts | October 1, 2020 | Written by Howard Wiens

A Primer on Alter Ego Trusts and Joint Partner Trusts

First, let’s start by saying that Alter Ego Trusts (“AETs”) and Joint Partner Trusts (“JPTs”) are essentially the same thing, except that AETs are created for one person and JPTs are created for two people who are married or living together in a marriage like relationship. Everything that is stated below about AETs also applies to JPTs and they generally work the same way.

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What is an Alter Ego Trust and how is it created?

An AET is created by a Settlor who signs a Trust Deed and who appoints a Trustee and Beneficiaries within that Trust Deed. To help explain this further, let’s create a fictitious person named Sam. In order for Sam to create an AET, he has to satisfy a couple of basic requirements: Sam has to be at least 65 years of age (for a JPT, only the Settlor spouse needs to be 65+), and he has to be a Canadian resident with assets in Canada. If Sam meets these requirements, then Sam can create an AET.

In the AET Trust Deed, Sam would be the Settlor creating the AET and he would appoint himself as the Trustee in order to manage the AET’s assets on an ongoing basis. In this way Sam keeps control of the Trust’s assets.

Sam would also appoint himself as the sole beneficiary of the AET for as long as he’s alive. It is a requirement of the AET that only Sam can receive the benefit of the Trusts’ assets while he’s alive. But Sam can also appoint other people within the Trust Deed to benefit from the AET’s assets once Sam has passed away.

Once the AET has been created, Sam then takes some (or all) of his assets (e.g. house, investments, bank accounts, etc.) and transfers these assets from himself to his AET. In this way, Sam no longer owns his assets himself in his personal name, but instead his AET owns them….which is why it’s called an Alter Ego Trust.

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What are the advantages of an Alter Ego Trust?

In British Columbia, perhaps the main benefit of an AET is that Sam, through his AET, can distribute the AETs assets in any way that he likes upon his death, without having to be concerned about the Wills Variation aspects of the Wills, Estates and Succession Act (“WESA”). Many people are perfectly happy to leave their estate to all of their children in equal shares. But if Sam doesn’t want to do this, for any number of reasons, WESA presents a problem. Under WESA, Sam’s spouse, or any of his children, who believes she has not received her fair share of Sam’s estate can apply to the Court to have the terms of Sam’s Will varied. This Court application can be acrimonious, lengthy, costly and gives little certainty to Sam (or the beneficiaries named in his Will) that his wishes will be carried out. One way to avoid or minimize this problem for Sam is to ensure that he has no assets when he dies. This is done by Sam transferring his assets to his AET during his lifetime, and stipulating in his AET how these assets are to be distributed upon his death. The AET is not subject to the rules in WESA.

If Sam transfers all of his assets to his AET, another benefit is that his estate won’t need to be probated when he dies. Because the assets aren’t owned by Sam personally at the time of his death, but are owned by the AET, there is no estate to probate. Furthermore, since there’s no estate to probate, Sam can also maintain privacy over how he distributes the assets through the AET. Probate applications are “public” documents and can be searched at the Courthouse, but distributions of assets through an AET are “private”. Finally, if there are no assets to probate, the rules in WESA about the timing of distribution of the assets also don’t apply. This allows the AET’s beneficiaries to receive the assets more quickly than the beneficiaries named in Sam’s Will would.

For all of these reasons, an AET is often referred to as a “Will substitute” and can be a very useful tool in the estate planning toolbox.

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What are the disadvantages of an Alter Ego Trust?

Generally speaking, the disadvantages of an AET boil down to their cost and complexity.

Firstly, there’s the cost of creating the AET. Typically, the AET is created by a lawyer and reviewed by an accountant.

Secondly, once the AET is created, it will need to file its own separate income tax returns on an annual basis. Given the complexity of these types of tax returns, this typically involves an accountant each year.

Finally, any income earned within the AET is generally taxed at a rate that’s often higher as compared to the individual’s tax rate.

The information above is intended to provide a very high-level and general overview of some of the common questions that we often receive about Alter Ego Trusts.

© Linley Welwood LLP. The contents of this article do not constitute legal advice. Readers should seek legal advice in relation to their own specific circumstances.


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