Alter Ego Trusts PDF

Alter Ego Trusts A trust is a legal relationship between three parties: The Settlor – the individual who sets up the trust (through a document called a Trust Deed, which is also referred to as a Trust Agreement) and contributes certain property to it. The Settlor decides who will hold this property...

Alter Ego Trusts A trust is a legal relationship between three parties: The Settlor – the individual who sets up the trust (through a document called a Trust Deed, which is also referred to as a Trust Agreement) and contributes certain property to it. The Settlor decides who will hold this property, how this property will be managed and used, and to whose benefit the property is intended; The Trustee – the individual who is appointed by the Settlor to hold and manage the trust property under the instructions provided in the Trust Deed; The Beneficiary – the individual (or individuals) to whom the Trust property is to benefit. Alter Ego Trust is a special type of trust permitted under the Income Tax Act (Canada) (the "Act"), under which you are the Settlor, Trustee and Beneficiary for as long as you are living. The main criteria to be able to set up an Alter Ego Trust is that you must be 65 years of age or older. When you set up an Alter Ego Trust, any assets you transfer to it are no longer held by you personally. Instead, the Trust holds the assets, and you hold and manage them in your capacity as Trustee, for your own benefit. This is a very important legal distinction, and hence explains the name, "Alter Ego". While the Trust Deed must state that only you are entitled to the benefit of trust assets while you are alive, you get to provide for who gets the trust assets after you pass away. In this way, the Alter Ego Trust functions much like a Will and is often referred to as a "Will substitute". Having your eventual "estate" held in an Alter Ego Trust rather than by you personally can offer a number advantages: Probate is not required Privacy is maintained Beneficiaries can receive their inheritance with less delay Professional fees are reduced Income tax treatment Alter Ego Trusts receive a special treatment under the Act. For other types of trusts, the Act provides that when you transfer property to the trust there are usually income tax consequences; that is, such transfers will be treated as though you had sold this property to an unrelated party for fair market value, known in tax terms as a "deemed disposition". Further, the Act says that every 21 years, there will be another deemed disposition, likely resulting in further income tax being payable. In comparison, Alter Ego Trusts receive a rollover treatment which means that there is no deemed disposition when you transfer your property into these kinds of trusts. Instead, the deemed disposition is deferred until the time of your death (which similarly occurs with personally held assets when you pass away as well). Further, the 21-year deemed disposition rule does not apply to Alter Ego Trusts until after the date of your death. While Alter Ego Trusts can provide a number of advantages, the following are some disadvantages to consider as well: Tax returns will need to be filed You will need to file annual tax returns for your Alter Ego Trust, which may require the assistance of an accountant and therefore additional accounting fees. Income retained in the Trust will be taxed at the highest marginal rate Any income generated by the trust assets and retained in the trust (i.e., rather than paid out to yourself as the beneficiary) will be taxed at the highest marginal tax rate. Any capital gains that have accrued on trust assets will be subject to the deemed disposition on your death at the highest marginal rate (rather than at the graduated rate, if held personally at death), unless any exemptions apply.