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.
Questions?
General Enquiries: 613-726-7788
Fax: 613-729-4477
200 – 900 Morrison Drive
Ottawa, ON
K2H 8K7
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