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When organizing your estate affairs, we recommend to all our clients to seek professional advice from a certified insurance advisor, accountant, and financial planner, in addition to a wills & estates lawyer. This collaborative approach ensures a more well-rounded and effective estate plan.

In devising a strategy for asset protection and wealth management, it is crucial to use best efforts to attempt to ensure a seamless transfer to beneficiaries upon an individual’s demise. Trust mechanisms can provide an effective solution for this purpose. As Estate Lawyers, we often receive inquiries on how to create the most effective estate plans to ensure the preceding. Implementing a Joint Spousal Trust (JST) or an Alter Ego Trust (AET) can offer considerable benefits, optimizing estate planning objectives and providing solutions for managing and protecting assets both during one’s lifetime and after death.

A Joint Spousal Trust (JST) is a trust where assets are transferred into the trust, and either one or both spouses are entitled to receive all income and capital of the trust prior to the death of the surviving spouse. To set up this trust, one of the spouses must be 65 years of age or older and a Canadian resident.

An Alter Ego Trust (AET) is a trust allowed under the Income Tax Act 1985, through which any assets that are transferred into the trust are no longer held by the settlor in personal capacity. Consequently, the trust holds the assets and, typically, the settlor controls the assets as a trustee, for as long as they are living. Through this mechanism, a designate can also be appointed who receives the trust assets after the settlor’s death. Such a trust can be setup only if, settlor is 65 years of age or older and a Canadian resident. An important reference in this discussion is that the primary beneficiary refers to the individual who created the trust, and their spouse.

Below is a list of some advantages available upon the use of these trust mechanisms in estate planning in Ontario:

1. Probate Planning and Fee Avoidance: Transferring assets into a trust can help bypass the probate process, saving time and reducing costs. Unlike a Will, which requires probate to administer the estate, a trust allows the trustee to manage assets without this step. This results in quicker inheritance distribution and lower legal expenses.
2. Privacy: Trusts offer greater privacy compared to Wills. When a Will is probated, it becomes a public document, revealing the intentions and the estate’s value whereas trusts remain private, safeguarding confidential information.
3. Foreign Assets: For those with assets in multiple jurisdictions, appointing a single trustee for a trust can simplify management, eliminating the need for multiple powers of attorney.
4. Ease of Control: The settlor can manage the trust by appointing themselves as the trustee and designating a replacement if necessary. This control avoids the need for a power of attorney.
5. Avoiding Estate Litigation & Planning for Families: Trusts provide flexibility and protection, ensuring assets are allocated according to the settlor’s intentions without legal challenges. This is particularly useful for blended families, allowing the settlor to provide for a second spouse while preserving assets for children from a previous marriage. Trusts also mitigate the risk of disputes over unequal asset distribution.

Despite their benefits, trusts such as Joint Spousal Trusts (JST) and Alter Ego Trusts (AET) have potential downsides. The complexity in formation of a trust can make them difficult to interpret and understand for an ordinary individual. Additionally, trusts incur supplementary costs, including setup fees and annual tax return filings. In addition, some negative tax implications may arise as well, such as the potential mismatch of losses against gains from the settlor’s personal assets and the lack of access to graduated rate estate tax rates. Depending on the estate’s specific requirements and circumstances, trusts may not always be advisable.

For comprehensive estate planning, it is important that proper professional advice is taken, especially from applicable professionals (i.e. accountant and/or tax lawyer, insurance advisor, and financial planner. Given your personal needs, if you are planning to use a Joint Spousal Trust or an Alter Ego Trust, the lawyers at Kormans LLP are available to discuss your specific estate planning needs and provide you with suitable options in consultation with your additional retained professionals for estate planning and assist you to help prepare for the future. Please don’t hesitate to get in touch with us at (905) 270-6660 or by email at info@kormans.ca.

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M. W. Faizan is an Associate Lawyer at Kormans LLP. You can reach M. W. Faizan here: mwfaizan@kormans.ca.

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