Alter ego and joint partner trusts

Privacy, probate minimization and more for those 65+

In estate planning, your Will is the central document for controlling what happens with your property at death. It could be argued though that having a Will alone could, in a sense, be too much management held in one place.

As odd as that may sound, a Will is a product – albeit a very important one – of you thinking through your own needs and those of the important people around you, and deciding how best to take care of them. That’s the estate planning process, and your Will’s role is to set out who is to receive the property you own when you die.

However, sometimes it may make sense to make changes so that select property does not flow through your Will, and therefore is not part of your formal estate. That is where alter ego and joint partner trusts can offer greater flexibility and control.

Mechanics of alter ego & joint partner trusts

Alter ego and joint partner trusts are inter vivos trusts, meaning they are set up while you are living.

You must be at least age 65 to set one up, with an alter ego trust for one person and a joint partner trust for a couple.

Commonly you will be both trustee and beneficiary, though you can also include one or more others as trustees with you. That will provide some flexibility should you become incapacitated while living, as discussed further on. Trustees have all the legal powers to buy, sell and manage the property that you have decided to transfer into the trust. As the beneficiary, during your life you are entitled (and actually required) to receive any income, and you have full use and enjoyment of the capital, just as you did before the trust was created.

You can name one or more residual beneficiaries. If it is an alter ego trust for yourself then those residual beneficiary rights will arise on your death. In the case of a joint partner trust, the survivor of the two of you will continue on as beneficiary on a first death, and then the entitlement of those residual beneficiaries will take effect on the survivor’s death. Commonly the residue would be paid out upon death of the primary beneficiary/ies, but it is also possible to draft it so that the trust will continue on for a period of time if you wish.

Income tax issues

These trusts may be used with any property you may own, but most often the focus is on real estate and non-registered investment accounts. With the exception of your principal residence, a property transfer usually triggers a taxation disposition.

Fortunately, you may roll capital property into these trusts at their cost base. Thereafter, income and capital gains realized in the trust are taxable to you (or both of you for a joint partner trust), in proportion to the assets you contributed.

At death, in the case of an alter ego trust (or at the second death with a joint partner trust), all remaining property is deemed to be disposed, with any resulting capital gain/loss is reported on the trust’s tax return. The trust’s capital gain/loss cannot be netted against capital gains/losses realized on your death by you personally. For this reason, you must carefully consider what initially goes into the trust and what you will continue to own personally, and carefully monitor all pending tax liabilities.

As an incapacity substitute, and for continuity of management

You should still have powers of attorney (POAs) for property and personal care drawn up in case you become incapable in future. Bear in mind though, that POAs can only deal with property that you own yourself, meaning that the named attorneys would not have legal power over the trust property.

With this in mind, whether it’s an alter ego or joint partner trust, you can name one or more co-trustees who can act with you now, act for your benefit later, and continue to act after your death as trustees for your residual beneficiaries. It is possible and common to name the same people as trustees and attorneys, or you may prefer to name different people as a way to spread out responsibility and oversight.

Estate liquidity, and time & cost savings of avoiding probate

On your death, the continuing trustees will have control of the trust assets without having to wait for a probate application. Not all provinces levy probate tax, and should not be a driving concern in your estate planning anyway. However, if the other features of these trusts serve your needs, then this cost saving is a bonus.

Privacy and insulation against estate litigation

Unlike a probated Will that can become part of a court file, trusts of this sort do not have to be made public. Apart from maintaining your privacy, this can be especially important if you or your beneficiaries are concerned about creditors. And even if those creditors pursue their claims, there are narrower means to attack a trust than may be available with a Will challenge.

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Spousal rollover … or not?

To defer, or prefer to incur

After a good long run, dad died midway through his 99^th year. Mom and we kids will miss him dearly – they actually called each other “dear” – but it was his time.

Mom is nearing the mid-90s herself. Customarily, everything would roll to her to get around the tax on deemed dispositions at death that would otherwise erode dad’s estate, of which mom is the sole beneficiary – But could we do better for her?

It’s one of those mantras of financial planning to arrange beneficiary designations and joint accounts to allow streamlined continuity to a spouse. Even so, it’s equally important to pause and consider whether to opt out, particularly for deaths early in the year. Dad died in January, so with only a couple weeks of income, there remains plenty of room to make use of his basic personal credit and low bracket tax rates.

Following are some steps we undertook, along with the odd snag along the way.

Pension rollover

To begin, notice was given to the administrator of the defined benefit pension that was their primary income source. As surviving spouse, mom will continue with a reduced pension, emphasizing the need to be tax-conscious with her other income sources. There won’t be any residual value when she dies, but with the two of them living well into their nineties, they got their fair actuarial share out of the deal.

RRIF on death

Mom handled the house when we were youngsters, followed by a lengthy run as a school trustee. Dad took early retirement at 60, then kept busy with teaching and consulting gigs into his 70s. Thus, despite having a dependable pension, both had moderate accumulation in registered retirement income funds (RRIFs), each naming the other as beneficiary. Their financial advisor (a friend to us all) readied the paperwork to roll dad’s RRIF to mom.

Acting under power of attorney (POA), we instead declined the receipt of the RRIF on mom’s behalf. Accordingly, the amount will be included in dad’s final year income, soaking up the remainder of his basic personal credit
(i.e., at zero tax), with the rest tagged with the lowest bracket rate.

RRIF minimums

In their later years, we have been managing their finances under POA. This included instructing on taking the minimum RRIF withdrawal early in the year. That meeting was still in the upcoming calendar when dad died.

The RRIF minimum, based on the preceding year-end value, is required to be paid in the following calendar year. Per CRA and the administrator’s practice, as it had not been paid before dad’s death, that portion had to be paid and taxed to mom as the named beneficiary (though again as noted above, the bulk had been declined, to be taxed in dad’s final year).

TFSA rollover

One great thing about a TFSA rolling to a spouse is that it continues to be a TFSA, without requiring or using up the receiving spouse’s TFSA room. Notably, unused TFSA room does not roll to a spouse, nor to anyone else for that matter. Fortunately, mom and dad were consistent TFSA contributors, with the combined amounts now being with mom, except for the lost room for dad’s final year due to the contributions not having yet been made.

(Not) naming beneficiaries under POA

For registered accounts in Ontario (and most common law provinces), attorneys under POA cannot initiate or change beneficiary designations. However, many financial institutions will carry over an existing designation on an incoming registered plan, which was helpful as we were consolidating their financial holdings when their faculties had significantly declined.

Unfortunately, dad had one small TFSA without a designation. As we could do nothing about it, probate was inevitable for dad’s estate. On the bright side, it bolstered our decision to allow the RRIF to fall into the estate, with the projected income tax savings well exceeding the nominal bump in probate tax.

Joint non-registered account

The proceeds from their home sale years ago went into mom and dad’s joint non-registered investment account. That’s helped service their later accommodations, while also appreciating nicely. Probate was bypassed at dad’s death, with mom continuing as sole legal and beneficial owner by right of survivorship.

By default, capital property rolls at adjusted cost base (ACB) to a spouse on death. This applies when held through a joint account as in this case, or if dad had an account under his name alone that was then migrated to mom as estate beneficiary (as long as the individual securities in the account were not sold in the process).

Alternatively, dad’s estate can elect out of the automatic rollover, on a per-property basis. This will allow us to optimize for mom’s future needs by choosing which securities to rollover, and which to have taxed in dad’s final return. As mom could conceivably blow right past dad, the century mark and beyond … that extra financial flexibility will be welcome comfort for her as she moves into this next chapter.

Money for your matrimony

Planning your wedding on a firm financial footing

You’re in love, and you’re ready to take the plunge into marriage – congratulations! But maybe take a deep breath before diving in. That’s not a comment on your relationship, but an alert that if you’re not fully prepared, you could land in a deep financial hole as you begin your life together. Here are some tips to keep in mind as you begin planning for your special day.

Do your research, then create a checklist before you start spending

As much as your parents can tell you how it was done in their day, that was literally a generation ago. A quick internet search reveals that the average cost of a wedding in Canada could push past $20,000. Use your next search to find a good checklist that outlines the major decisions involved so you’re prepared to deal with them.

Set a date based on your time availability to reach it from today

We humans don’t make our best decisions when we are under pressure. Why invite anxiety by setting a date that compresses your ability to properly explore and vet your options? With checklist in hand, visualize how you will juggle those many tasks based on your available schedule, add a couple months, then set a date you can meet.

Use a budget, and do sweat the small stuff

You now have enough to work with to set a budget, at least with estimates based on large categories of expenses: hall rental, photographer (does this generation even bother anymore?), flowers, etc. This is a living exercise where you will learn and adjust at each step along the way. And be vigilant on the so-called small stuff; an extra buck or two for each trinket multiplied by 30 (or 300?) guests adds up quickly – plus HST!

Route your money through a single savings account

I should have mentioned that saving regularly will have served you well to accumulate at least some of what you will need. Then use that same account to monitor your spending progress. Whether it’s paid by the principal participants or their parents, and whether you use cash, debit, cheque, credit, e-transfer, or any other method … routing the money through one account makes tracking – and adjusting – more manageable.

Using credit may be inevitable, but plan how you’ll pay it back

Even with the best planning, you will likely require some debt to pull it all together, whether that’s supplier accounts, a credit card balance, formal loans or personal IOUs. Before the big day arrives, try to estimate how long it will take to pay it off, then get to it in earnest once you’re back from the honeymoon and settled.

While it may seem unromantic to focus too much on the finances, a well-considered plan will allow you to be fully in-the-moment on your wedding day, which is the best gift you can give to your new better half.