Alter Ego and Joint Partner Trusts in BC: Are They Worth It at 65+?

Alter ego and joint partner trusts are special trusts under the federal Income Tax Act that only people aged 65 or older can set up. In BC they are mostly used to avoid probate fees, keep estate details private and plan for incapacity.

They are useful tools, but not a default. This guide explains how they work, what they really save, what they cost you in flexibility and paperwork, and the questions to ask before you move assets into one.

What these trusts are

Both trusts are defined in s 248(1) of the Income Tax Act by reference to s 104(4)(a). In plain terms:

• Alter ego trust. You create it during your lifetime, after you turn 65, and you are entitled to all of the trust's income while you are alive. No one else can receive or use the income or capital of the trust before your death.
• Joint spousal or common-law partner trust. The same idea for a couple: you and your spouse or common-law partner together are entitled to all the income until the later of your deaths, and no one else can receive or use income or capital before then.

After the death (or the second death), the trust document says who receives what, much like a will. You can usually act as a trustee yourself, with a replacement trustee named to take over if you die or lose capacity.

The tax rules: a rollover in, a deemed sale at death

Normally, moving an asset you own into a trust is treated as a sale at fair market value, which can trigger capital gains. For these trusts, s 73(1.01) and (1.02) of the Income Tax Act let you transfer property at its tax cost instead, unless you elect otherwise. That is what makes them practical.

The tax is deferred, not avoided. Under s 104(4)(a)(iv), the trust is deemed to dispose of its capital property at fair market value at the end of the day you die, or the day the surviving partner dies for a joint trust. The trust, not your estate, reports that gain. For most families, the income tax result is broadly similar to what would have happened under a will, so the case for these trusts rests on other benefits.

Probate fees and privacy

BC's probate fee is charged on the "value of the estate" that passes to the personal representative at death, as set out in the Probate Fee Act. Assets properly held in a trust before death do not pass to your executor, so they are not counted. The fee is $6 for every $1,000 of value between $25,000 and $50,000, and $14 for every $1,000 above $50,000.

As an example only: assets worth $1,000,000 passing through probate would attract a fee of about $13,450. Holding those assets in an alter ego trust instead would remove them from that calculation, although the trust has its own costs. Our article on ways to reduce probate fees in BC compares trusts with simpler options such as beneficiary designations.

Privacy is the other draw. A probate application lists the estate's assets and goes on a court file. Assets in a trust pass under the trust document, which is not filed in court.

Wills variation: what a trust does and does not change

Under s 60 of the Wills, Estates and Succession Act, a spouse or child can ask the court to vary a will that does not make adequate provision for them, and the order is made out of the will-maker's estate. A claim must generally be started within 180 days of the grant (s 61). Because assets properly settled in a trust during your lifetime are generally not part of your estate, a trust can reduce what is available to a wills variation claim.

That is not the same as making a plan challenge-proof. A trust can still be attacked on other grounds, for example that you lacked capacity, were unduly influenced, or did not really intend to give up the assets. Using a trust mainly to defeat family members' claims is the kind of plan that tends to attract litigation, so be candid with your lawyer about your goals.

The trade-offs

• Cost and paperwork. You pay to set the trust up and to transfer assets into it, and the trust has its own annual administration and tax filings.
• Real estate. Transferring BC land to a trustee is a transfer under the Property Transfer Tax Act. Check before you sign whether tax applies, and whether your mortgage lender must consent.
• Less flexibility. Assets must be retitled, and accounts must be opened in the trustees' names. You keep control as trustee, but you must follow the trust terms.
• Not for everything. Registered plans, life insurance with named beneficiaries and some jointly held assets already pass outside probate.

Who tends to benefit

These trusts are most often worth considering if you are 65 or older and have:

• a larger estate, especially real estate or an investment portfolio, where probate fees would be significant;
• a strong preference for privacy;
• a wish to have a trusted person manage assets smoothly if you lose capacity; or
• property in more than one province, where multiple probate applications could otherwise be needed.

For a modest estate, or one that already passes mostly outside probate, a carefully drafted will and power of attorney may do the job at lower cost.

Wondering whether a trust fits your estate plan?

Our wills and estate planning lawyers can review your assets, your will and your family situation, explain whether an alter ego or joint partner trust is likely to help, and prepare the trust and the documents that go with it if it does.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.