Volume 11 Number 3 October 2002 The Scrivener 39

Pat Johnson

Astute Estate &Insurance Planning

Alter Ego Trusts

An alter ego trust is a trust created by anindividual that takes effect during his orher lifetime, and that meets certainrequirements under the Income Tax Act(Canada). The person creating the trust(known as the “settlor”) must be 65 yearsof age or older at the time the trust iscreated and be resident in Canada forincome tax purposes. The trust must alsobe resident in Canada (which generallymeans that a majority of the trusteesmust be resident). Under the terms ofthe trust, the settlor must be entitled toreceive all of the income that arisesbefore the settlor’s death and no personother than the settlor can be entitled toreceive any part of the income or capitalprior to the settlor’s death.

Similar trusts can be created for thebenefit of an individual and his or herspouse or common law partner but,space being limited, will not be discussedhere. Provided that the trust meets therequirements set out above, there willgenerally be no immediate taxconsequences to the transfer of assets tothe alter ego trust.

The benefits of using an alter egotrust include the following.

• Removing assets from theindividual’s estate, thus reducing theassets that may be exposed to a claimby a spouse, common law partner, orchild under the Wills Variation Act.(This legislation permits any of thesepersons to challenge a Will on theground that they were notadequately provided for.)

• Removing assets from the individual’sestate, thus reducing the amount ofprobate fees payable if the executor isrequired to obtain probate.

• Minimizing the public disclosure ofthe individual’s affairs that resultsfrom probate.

• Providing an alternative to theappointment of another personunder a Power of Attorney to lookafter the individual’s affairs in theevent of his mental incapacity.

• effectively winding up the trust bytransferring all assets back to thesettlor;

• changing the length of time the trustwill continue in effect;

• changing the trustees;• changing the beneficiaries or their

interests in the trust property;• adding further property to the trust,

and• amending the trustees’

administrative powers.

If the trust is still in place at the timeof the individual’s death, it will take theplace of the individual’s Will, withrespect to assets held in the trust. Theindividual should, however, still have aWill, to deal with any assets that havenot been transferred to the trust.

The initial document prepared tobring an alter ego trust into existence isthe trust agreement (which will be a“declaration” if the settlor is also the soletrustee, or a “settlement” if there areother trustees). The trust agreement, ifwell drafted:

• establishes the trust;• sets out the general framework as to

distributions to the beneficiaries;• confers on the trustees, various

powers to pay out income and/orcapital, in accordance with thespecific provisions of the trustagreement;

• can confer on the settlor, variouspowers to change the “default”

Unlike a Will, a trust of this type is notusually revocable.

Unlike a Will, a trust of this type isnot usually revocable. It is, however, stillpossible to effect a number of changesafter the trust has been established,including:

Tony DuMoulin wrote about Alter Ego Trusts in our Winter 2001issue. Because Alter Ego Trusts canbe an important estate planningstrategy, we have asked Pat Johnsonto submit this piece.

40 The Scrivener Volume 11 Number 3 October 2002

provisions in this general framework,including the power:- to wind up the trust earlier than

the maximum time periodprovided in the trust agreement;

- to alter the distribution of incomeand capital among the secondarybeneficiaries;

- to add beneficiaries to the “defaultlist” set out in the trust agreement;

- to exclude as beneficiaries anyoneon the original “default list”;

• can confer on the trustees, variouspowers to change the “default”provisions in this general framework,including the power:- to wind up the trust earlier than the

maximum time period provided;- to amend the administrative powers

set out in the trust agreement; and• can confer on the settlor the power

to appoint and remove trustees.

Other, ancillary documents commonlyused may include:

• a deed of gift of additional property; • transfer documents for the specific

assets transferred into the trust; • a declaration of trust by nominees

(often used with respect to real estatetransferred to the trust where thetransfer is not registered);

• a revocable deed of appointment ofreplacement trustees; and

• a revocable deed of appointment ofcapital and income. The deed ofappointment of capital and income(which can be revoked and changedby the individual during his lifetime)alters the default provisions in thetrust agreement as to distribution ofincome and capital after the death ofthe individual.

In most cases, the settlor will wish toretain a “capital interest” in the trust, inother words, the ability to receive notjust income from the trust but thecapital, as well. Where this is the case,the settlor will be taxed on all of theincome, gains, and losses of the trustduring his lifetime. (This is essentiallythe same position the settlor would be inif the assets had not been transferred tothe trust.)

On the death of the settlor, the alterego trust will be deemed (for income taxpurposes) to have disposed of all of itsassets, thus triggering any accrued butnot yet realized capital gains. As this gainwill be taxed in the trust, and not in thesettlor’s estate, it is important to ensurein the initial planning stages that anycapital losses that the settlor is carryingforward can be used during his lifetime,because these losses will not be availableto offset any gains in the trust.

An alter ego trust is an inter vivostrust, not a “testamentary” trust.Accordingly, after the death of thesettlor, it will pay income tax at the topmarginal rate on so much of its incomeand gains as are not distributed to itsother beneficiaries. Income or gains thatare so distributed will be taxed in thehands of the beneficiaries at the ratesapplicable to them.

In addition to the income tax issuesinvolved in using an alter ego trust, apotential settlor and his advisors mustconsider the application of propertytransfer tax. There is no exemption fromthis tax on registration of a transfer ofreal estate to the trustees. Accordingly, ifa transfer cannot be registered in thenames of nominees, utilizing an availableexemption, for example, a transfer of aprincipal residence between “relatedindividuals,” a decision must be made asto whether the probate savings (or otherobjectives) outweigh the cost oftriggering this tax.

Anyone considering the use of analter ego trust should consult legalprofessionals and tax specialists regardinghis or her specific circumstances. ▲

Pat Johnson is a lawyerpractising in Victoria, primarilyin the areas of trusts,incorporated professionals, andcorporate reorganizations.

Voice: 250 380-7728Fax: 250 380-7758office@pjlawcorp.com.

Volume 11 Number 3 October 2002 The Scrivener 41

Don Hickling

Astute Estate &Insurance Planning

Supporting your Favourite Charityon a Budget

Thank goodness British Columbians givegenerously to the charitable sector. Theyrecognize that every day in BC, people’slives are enriched by the efforts of not-for-profit organizations, and thatfinancial assistance is essential to supporttheir important work. Donors have tobalance their own financial reality withtheir wish to support a favourite charity,however. Perhaps they are living on afixed income and, as the cost of livingrises, they find themselves in a positionwhere they can no longer provide thesame level of financial support.

It is important to remember that thenot-for-profit sector is grateful for, andbenefits tremendously from, every gift—whether it is $5 or $500,000.

“After-Tax Dollars” The donor should always think of his orher charitable gift in terms of “after-taxdollars.” Federal and provincialgovernments provide generous taxincentives for charitable gifts. People whomake a charitable donation are entitledto a tax credit in calculating their federaland provincial income taxes. Forsomeone in a relatively modest incometax bracket (37.7 per cent), the after-taxcost of a $100 donation is roughly $62(after the first $200).

Although you would not realize thissaving until after you file your income tax

return, it is certainly nice to know thatmoney you would have otherwise paid tothe Canada Customs and RevenueAgency (CCRA) is being directed to acause you want to support.

common types of deferred gifts aredescribed below.

The Charitable BequestThis is done by arranging a charitablegift through a bequest in a Will.

Many people set aside a certaindollar amount. Others leave a percentageof their estate or any assets left over aftertheir families have been provided for.Some people donate an actual piece ofproperty, such as a car or their home.

Naming a Charity as DirectBeneficiaryDonors can talk to their financial advisorand have the charity named a directbeneficiary of their RSP, RIF, or lifeinsurance policy. This is one of thesimplest and easiest ways for the charityto receive the gift because the proceeds ofthe plan do not need to pass through theestate.

The All-Important TaxBenefits Although rarely a motivating factor, thetax savings for the estate can be quitesubstantial when the charity receives thefunds under the terms of a Will or as thebeneficiary of a retirement or lifeinsurance plan. In preparing the finalincome tax return for the deceased, theexecutor can use the donation receipt toclaim a donation tax credit up to 100 percent of the net income.

It is important toremember that the

not-for-profit sector isgrateful for, and

benefits tremendouslyfrom, every gift—whether it is $5 or

$500,000.

Deferring the GiftFor people whose finanical circumstancesprevent them from making an immediategift to their favourite charity, there aresome other very good options. This ofteninvolves deferring or postponing the gift.A deferred gift entails the donors makingarrangements now for a future gift to acharity. In arranging for this future gift,e.g., through a charitable bequest in aWill, the donors have the satisfaction ofknowing they will be helping a charity,without giving up income or assets theymay need during their life. The most