What is an Alter Ego Trust?
An alter ego trust may be used to avoid wills variation claims. When someone dies, everything that was in their legal name at the time of death is presumed to form part of the deceased’s estate. It is the deceased’s estate that then passes to beneficiaries. Who the beneficiaries are is usually determined by the deceased’s will. When there isn’t a will, the beneficiaries are determined by statute. In BC, the statute that determines beneficiaries of an estate is the Wills, Estates and Succession Act, SBC 2009, c13 or WESA.
Once property is part of a deceased’s estate, there are certain consequences for that property:
- All wills in BC are vulnerable to challenges by spouses and children of a deceased under WESA s. 60;
- All property passing through an estate is subject to probate fees; and
- A list of the assets and liabilities in every estate becomes public if probate is sought.
More often than not, it is in the deceased’s best interest to avoid having property pass through their estate. There are a number of ways to plan you estate to avoid property passing through it. One way is by putting property in joint names with the intended beneficiary. Another way is by setting up an alter-ego trust which includes all property you wish to pass outside your estate. You would then collect income from your property until your death at which point it passes outside of your estate to the beneficiaries you name in the trust instrument.
To create the trust, you must transfer all of your property out of your name and into the name of the trust. This is a disposition for the purposes of the Income Tax Act and normally has tax consequences. Under the Income Tax Act, if you meet certain requirements, your trust may be considered an alter ego trust and the payment of taxes on this disposition is deferred until your death.
On your death, your property will pass outside of your estate because it was not in your legal name, but in the name of the trust. You will save probate fees, there will be no publication of a list of those assets included in the trust, and you will potentially insulate your property from claims under the s.60 of WESA.
Ordinarily, the trust instrument will be similar to a will in that it may provide for a “gift over” or instructions on what is to be done with your property on your death. Specifically, you can lay out who are beneficiaries and what they will receive, much like a will. On your death, the disposition of property to beneficiaries will be taxed differently depending on each specific situation.
Tax consequences should always be reviewed with the help of a tax and/or legal professional.
A recent BC Court of Appeal case deals with challenging alter ego trusts when they are created by attorney’s under powers of attorneys for principals. For more information on that case, please click here.
If you have any questions or concerns relating the challenging of an alter-ego trust, please don’t hesitate to contact us.