When coming up with an estate plan, we want to give as much as possible to our family and pay as little as possible in tax. This is why if you own real estate or other property and have started thinking about how best to give that property to your loved ones, tax should be the most important consideration. There are many strategies you can use to beat the death tax, but if you are over the age of 65 there are two special types of trust that were made with you in mind: the “Alter Ego” trust and, if you are married or have a common-law spouse, the “Joint Partner” trust
There are substantial tax and other benefits to using these two types of trusts to transfer property prior to your death. Unlike other trusts, transferring property to one of these two types of trusts allows the transfer to be deemed to have occurred at an amount equal to its original cost rather than at the fair market value. This prevents the normal tax consequences that come about when transferring property to other types of trusts. It is only at the death of the person who made the trust (or the last of the surviving partners, in the case of a joint partner trust) that the assets are deemed to be disposed at fair market value. In other words, capital gains tax is deferred until death, thus giving you the ability to succeed your assets in a much more tax efficient way.
To see if you qualify for these tax-efficient types of trusts there are some criteria that need to be met, but the two main criteria are:
- you must create the trust when you are 65 or older; and
- you must make yourself the sole income and capital beneficiary of such trust during your lifetime.
The Joint Partner Trust has the same criteria as the Alter Ego Trust except both you and your spouse (who does not need to be older than 65) must be the sole beneficiaries of the income and capital in the trust during your lifetimes.
It is important to receive professional advice before deciding which estate planning tools are right for you, but in summary here are some of the Pros and Cons of using these two types of trusts:
- Death Tax does not need to be paid on the property in the trust as that property is considered to be outside of the estate
- The trust can account for changes such as designating alternate beneficiaries, thus replacing the need for a will
- There can be issues with wills which address property outside of the jurisdiction in which the will is made, whereas these trusts can cover property located all over the world
- A trust is effective immediately on the date of creation whereas a will only becomes effective at the date of death, which means it is less likely to lead to estate disputes over the validity of the documents
- By designating alternate beneficiaries upon you and your spouse’s deaths, you can minimize the risk of your surviving partner distributing the assets to their new partner rather than in accordance with your wishes
- Normally, trusts are deemed to be disposed 21 years after creation; for these two types of trusts, deemed disposition for these trusts can occur after the 21-year mark
- Depending on how it is structured, it could affect the “Principal Residence” capital gains exemption and “First-Time Home Buyer” land transfer tax exemption of the beneficiaries of the trust
- Trust property could be subject to higher tax rates
- The person making the trust could be subject to tax on the income arising from the trust during his or her lifetime
- The trust cannot claim the lifetime capital gains exemption if it owns and then sells a business
- You cannot offset gains or losses in the deceased’s estate against gains and losses related to assets in these trusts
Whether you should transfer a certain piece of property into either of these two types of trusts will depend on the facts of your circumstances. It is important to receive professional legal and accounting advice before structuring your estate. Contact the legal professionals at Grinhaus Law Firm today to learn more about whether these trusts are suitable to ensure your loved ones are taken care of financially beyond your death.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT WITH A LICENSED PROFESSIONAL.