Trusts can be tricky to understand and administer for clients and advisors alike. This article is intended to answer some of the questions we receive from clients on a regular basis in the hopes of simplifying this often complex area of law.

What is a trust?

A trust is a relationship between a trustee and a beneficiary. The trustee holds legal title to the trust property for the benefit of the beneficiary. The trustee manages and controls the trust property in accordance with the terms of the trust and his or her duties as trustee. Trusts are either testamentary (created by will or other instrument after the will-maker dies) or inter vivos (created during the lifetime of the settlor, aka the person transferring property into the trust).

What is the difference between an Alter Ego Trust (AET) and a Joint Partner Trust (JPT)?

Both are similar in that they are specific forms of inter vivos trusts with specific requirements that must be met pursuant to the Income Tax Act. These trusts are exempt from some of the significant (and generally adverse) tax consequences that can arise in relation to other inter vivos trusts.

For an AET, the settlor must be a Canadian resident and over the age of 65, and as long as this person is alive, he or she is the only person entitled to the income of the trust. For a JPT, the settlor or settlors must both be over 65, the settlor and spouse must both be Canadian residents, and only they are entitled to the income as long as they are both alive.

What are the benefits of an AET or JPT?

In very general terms, these trusts are most commonly used to avoid probate and therefore the privacy issues and probate fees incurred as part of that process, or to avoid a will variation claim in relation to the assets forming part of a will-maker’s estate.

Are there any pitfalls?

Although assets constituting trust property will not be subject to probate fees, there are certainly tax consequences to consider before transferring assets into an AET or JPT. For example, where real property is involved, property transfer taxes may be payable on the transfer into and/or out of the trust. In addition, although a transfer of assets from the settlor to the trustee of an AET or JPT generally does not constitute a disposition for tax purposes, on the settlor’s death (or the death of the second to die of the settlor and the settlor’s spouse) there will be a deemed disposition of the trust property which, if there has been a capital gain, will therefore be taxed at the highest marginal tax rate, often resulting in a higher tax liability at death than would have been payable if the assets were still owned by the settlor in their personal capacity.

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This article is intended for information purposes only and should not be taken as the provision of legal advice. Grace C. Cleveland is a lawyer with the law firm of Cleveland Doan LLP and can be reached at (604)536-5002 or grace@clevelanddoan.com.