If there appears to be a significant risk that a spouse or children will challenge your will or distribution of your estate after the time of your death, you should consider using an alter ego or joint partner trust, which are trusts you create during your lifetime which set out the distribution of trust assets at the time of your death. We will discuss alter ego trusts below (for single individuals), but the concepts are equally applicable to joint partner trusts (for couples).
An alter ego trust is one established after 1999 by a living individual who is at least 65 years of age where that individual is entitled to receive all the income of the trust arising before his or her death and no person except the individual may receive or otherwise obtain the use of any of the income or capital of the trust before the individual’s death.
Trust income is paid or payable to the income beneficiary throughout his or her lifetime and is therefore taxed at the individual’s marginal tax rates. The transferor has access to the trust income and full control of the trust property prior to death.
Generally speaking, an individual may transfer property to his or her alter ego trust on a tax deferred (rollover) basis. The rollover will apply automatically unless the settlor elects to have the transfer take place at fair market value.
Benefit 1: Avoiding Wills Variation Act Litigation
In British Columbia, a child or spouse of a deceased individual who is unhappy with their share under a Will may apply to Court to have the Will altered, pursuant to the Wills Variation Act. A “child” includes all natural or adopted children, and a “spouse” includes someone you may have been living with for over two years in a common law relationship. The Wills Variation Act causes uncertainty as to how an estate may be divided after someone’s death. There are many similar fact patterns which have had very different outcomes in court. Accordingly, it is very difficult to predict what the eventual decision will be with a specific case. As well, the practical effect of any such action, win or lose, is greater legal fees payable by the estate, acrimony between surviving family members and the freezing of the estate assets until the case is resolved, which could take years.
If there is a risk of litigation under the Wills Variation Act, an alter ego trust is a good preventative measure. Since the assets are gifted before the person’s death to the alter ego trust, and are no longer owned by the person, those assets do not pass through that person’s estate when they eventually pass away. Accordingly, the assets would not be subject to the Wills Variation Act litigation. Note that a disappointed spouse may have remedies to undo the transfer of property to an alter ego trust, so it is important to get advice from an experienced estate planning lawyer.
Benefit 2: Probate Fees Avoidance
The probate process can be expensive. All of your assets are subject to probate fees, currently approximately 1.4% of the gross value of the estate (and subject to being increased by the acting Provincial government of the day). As well, there will be legal and accounting fees, which vary, depending on the nature of the assets involved. Altogether, the amounts involved to the estate can be significant. As the assets are no longer in the estate, there will be no probate fees payable on assets located in an alter ego trust. Particularly in larger estates, this can be a large savings.