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Use Of Alter Ego Trust, Partner Trust & Joint Partner Trust In Estate Planning

The above trusts are referred to as Rollover Trusts for income tax purposes in that assets can be transferred to them without creating disposition at fair market value for income tax purposes. These Trusts are therefore useful in estate planning.

Previously, there was only one such trust known as a Spousal Trust. Because some taxpayers did not want to transfer assets to a Spousal Trust as the spouse may die first, the Canada Revenue Agency introduced two additional trusts. A Joint Partner Trust now allows for the disposition at fair market value of the assets in the trust not to be triggered until the last of the partners to die. The Alter-Ego Trust is for a person who does not have a partner. The latter two trusts were introduced a couple of years ago and require that the transferor be 65 years of age in order to so establish such a trust.

These trusts are created during lifetime and remove the assets from the transferor’s estate and thus they would not be subject to probate nor a challenge under the Wills Variation Act.

From an income tax point of view, these trusts are often used in conjunction with an estate freeze whereby the transferor receives special preferred shares for the assets he has frozen through the use of a corporation. These special preferred shares can then be transferred into the Joint Partner Trust. After-tax income earned on the assets in the corporation can then be used to redeem the frozen preferred shares during the transferors lifetime. This removes the capital gains tax generally associated with those frozen preferred shares thus saving ultimately 22% capital gains tax. If the corporation earns investment income, the personal tax on the deemed dividend redemption proceeds is less than the dividend refund to the corporation and thus there is no additional current tax cost of redeeming the freeze shares. Further, if these freeze preferred shares were held by an Alberta Trust, both the annual tax on the redemptions and the ultimate capital gains tax could be substantially reduced.