Why consider alter ego trusts for charitable giving?
Mary A. Richter, Wills and Estates Lawyer
On behalf of Leona Gonczy, Gift Planning Officer, Alzheimer Society of B.C.
As a wills and estates lawyer in Vancouver, I see an increasing number of clients diagnosed with the early stages of Alzheimer’s disease or another dementia, and their family and friends looking for strategic ideas for charitable giving.
For those over age 65 years of age, an “alter ego trust” to distribute assets on death offers many advantages. Avoiding will challenges, saving probate fees and legal costs to probate a will, preserving privacy, allowing for an immediate distribution of assets to beneficiaries upon death and protection against future creditors are just some of these advantages.
An alter ego trust is created by a written agreement called a “trust agreement.” One who makes the alter ego trust is called the “settlor.” No tax is triggered when the settlor transfers assets into the trust as this trust receives the assets at the cost base of the settlor.
The alter ego trust is similar to a will as the trust agreement sets out where the trust assets go when the settlor dies. Because the assets in an alter ego trust are not distributed by a will, the distribution can be made immediately upon the settlor’s death, cannot be challenged under the legislation which allows wills to be challenged and can be kept private. Since probate is not required, no probate fees are payable on the trust assets. When a will is probated, a copy with the names of the beneficiaries, heirs-at-law and details of assets and liabilities held by the deceased all become public record. With an alter ego trust, one can keep private their assets, liabilities and how they want to distribute their assets upon their death. Tax is triggered on the trust assets when the settlor dies, and the alter ego trust is taxed at the highest marginal tax rate. Therefore, there can be significant tax advantages of including provisions in the trust agreement empowering the trustee on the settlor’s death to make charitable donations from the trust assets. These charitable donations can offset 75% of the income earned in the settlor’s year of death, thereby reducing the tax bill payable by the trust.
When considering an alter ego trust to donate to the Alzheimer Society of B.C. or another charity, we encourage you to consult with a legal advisor.
This article presents general information only. Contact your own advisor for specific advice about your circumstances.