An alter ego trust is an inter vivos created after 1999 by a settlor who was 65 years of age or older at the time the trust was created. A key property of this type of trust is that the settlor is the only one entitled to receive any income or capital distributions from the trust during his or her lifetime. It is only upon death of the settlor that the property passes to a beneficiary. This type of trust is typically used to avoid probate fees (which are charged at 1.5% on assets over $50,000 in Ontario) since the trust assets do not formally pass into the estate.
However there are some drawbacks to using this type of trust. The alter ego trust cannot use the capital gains exemption available in respect of qualifying property such as small business company shares. In addition, any losses within the trust can only be used to offset the gains of the trust and do not attribute back to the individual. In the year of death, capital losses can be used to offset non-capital gains in the year of death or the preceding year. Depending on the makeup of the investments, this could be a substantial benefit which may be unavailable. The alter ego trust does not form part of the Estate and therefore the assets cannot be used to form a testamentary trust. This is a type of trust that forms on death of a taxpayer and unlike an inter vivos trust, has the benefit of the marginal tax rates that apply to individuals. The potential savings are up to $17,000 per year however recently CRA has been discussing limiting the access to the marginal tax rates for a period of 36 months from the date of death.
Provided that the most common use of the alter ego trust is to avoid probate fees, the trust will typically have more than $500 of income and therefore would be subject to the annual filings requirement. Ensure that review both the benefits and the drawbacks to this type of arrangement to ensure that it meets your needs.
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