If you’re over the age of 65 and looking for a way to simplify your estate plan, protect your assets, and avoid probate, you may have heard of something called an “alter ego trust.” While the name might sound complex, the concept is surprisingly straightforward. For the right person, this type of trust can offer real advantages.
In this article, we’ll explain what an alter ego trust is, break down the pros and cons in everyday language, and help you figure out whether it might be a good fit for your situation.
What Is an Alter Ego Trust?
An alter ego trust is a type of living trust available to Canadians who are:
- Age 65 or older, and
- Residents of Canada
The trust is set up during your lifetime and holds assets for your benefit. You are the sole person entitled to all income from the trust during your lifetime, and no one else can access the assets while you’re alive. After your death, the assets pass directly to your named beneficiaries, without going through probate.
Think of it as putting your assets in a basket that you control while you’re alive. When you pass away, the basket passes smoothly to your chosen recipients, bypassing some of the delays and costs of the court process.
Why Would Someone Use an Alter Ego Trust?
Let’s walk through some of the main benefits that lead people to set up alter ego trusts:
1. Avoiding Probate
In Ontario, probate (also known as applying for a certificate of appointment of estate trustee) can be time-consuming and expensive. The fees are roughly 1.5% of the estate’s value over $50,000.
By placing assets in an alter ego trust, those assets won’t be part of your estate when you die, and therefore, they don’t go through probate. Your beneficiaries get their inheritance faster and more privately.
2. Privacy
A will becomes a public document once it’s probated. Anyone, including nosy neighbours or opportunistic distant relatives, can access it.
A trust, by contrast, remains private. The only people who see it are the trustee and the beneficiaries. If you value discretion, this is a major plus.
3. Protection from Will Challenges
Since your trust is set up and in effect during your lifetime, it’s harder for someone to argue you were unduly influenced or lacked capacity, which are common claims in will disputes. The alter ego trust can act as a shield against estate litigation.
4. Ongoing Management of Assets
If you become mentally incapable down the line (due to dementia, for example), your successor trustee, someone you’ve chosen, can step in and manage the assets right away. There’s no need to apply for guardianship or depend on a power of attorney being recognized by every institution. This provides built-in incapacity planning.
5. Efficient Asset Distribution
Because the trust doesn’t need to go through the court system, your beneficiaries get their inheritance more quickly. This can be especially helpful if your estate includes cash flow-dependent businesses or properties that need to be maintained.
6. Tax Neutral on Transfer
When you transfer assets to an alter ego trust, there is no immediate capital gains tax, as long as you’re the sole beneficiary during your lifetime. The trust “rolls over” the assets at their original cost. That’s different from most other types of trusts, which trigger a deemed disposition when assets are moved in.
So, What’s the Catch?
Like any legal tool, alter ego trusts have drawbacks too. Here are some things to watch out for:
1. Legal and Setup Costs
Setting up an alter ego trust involves legal fees. You also need to transfer title to certain assets (like real estate), which may involve land transfer tax or administrative costs.
2. Ongoing Administration
A trust requires ongoing attention. You will need to file separate tax returns for the trust each year (called a T3 return). You’ll also need to keep trust records and manage assets according to fiduciary standards.
3. Limited Flexibility
Once you put assets into the trust, you can’t name someone else as a beneficiary during your lifetime, and you can’t revoke the trust as easily as a will. If your relationships or goals change, the trust may be harder to update than a standard will.
Who Should Consider an Alter Ego Trust?
An alter ego trust isn’t for everyone. It’s best suited for people who meet some or all of the following criteria:
- You’re over 65 and in reasonably good health
- You own valuable assets (eg, a home, investments) that you don’t want to pass through probate
- You value privacy and want to keep your affairs out of the public eye
- You’re concerned about your will being challenged
- You want a backup plan in case you become incapable of managing your affairs
- You have a small group of beneficiaries, and your distribution plan is relatively simple
- You are willing to deal with some legal and administrative complexity now to simplify things later
This type of trust is particularly popular with single, widowed, or divorced individuals, especially those with adult children or a blended family situation. If you’re in a second marriage and want to ensure your assets go to your own children, an alter ego trust can help lock in those intentions.
Final Thoughts
An alter ego trust is a powerful estate planning tool, but it’s not a one-size-fits-all solution. It can simplify your estate, reduce probate costs, and give you more control during incapacity, but it also requires upfront effort and legal guidance.
If you’re considering whether this makes sense for you, we can help you weigh the pros and cons in your specific case and determine whether a trust is your best next step, or whether a carefully drafted will and power of attorney would be just as effective.
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