TSG (Tax Specialist Group) - Alternative To Alter-Ego Trusts (Trusts)

Alternative To Alter-Ego Trusts

Subject: Trusts
Number: 04-11
Date: 5/28/2004

Self Benefit trusts may help those under 65 in dealing with probate fees

In our February 7, 2003 Tax Tip, the usefulness of an alter-ego trust in probate planning and estate protection was reviewed. Since the release of the alter-ego trust rules commencing in year 2000, such a tool has become very useful in helping to achieve estate planning objectives.

One of the restrictions on the use of an alter-ego trust is that the person transferring property to the trust must be 65 years of age or older at such time. This limits planning for people that have not met the age restriction. However, for persons who have not met the age restriction, one could consider the use of a "self-benefit" trust. Such a trust does not have an age limit restriction. However, a self-benefit trust has other restrictive conditions that would need to be carefully reviewed before utilizing such a tool.

Very generally, to the extent that property of a taxpayer who is less than 65 is transferred to a self-benefit trust where there is no change in beneficial ownership of the property, and there is no absolute or contingent right of any person, other than the person who transferred the property to the trust, then the transfer of such property to a self-benefit trust will not trigger a capital gain. Normally, such transfers of property to a trust result in a disposition at fair market value of the trust property. However, to the extent that the conditions as previously stated are met, no income tax payable would result.

The use of a self-benefit trust would usually not assist in income tax savings since any income generated from the self-benefit trust property would attribute back to the transferor. However, such a trust may be useful in probate planning in provinces where probate would otherwise be a significant cost to the deceased.

Any member of TSG would be pleased to assist in analyzing whether or not a self-benefit trust is appropriate in your circumstances.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.