Life Interest Trusts – spousal, joint spousal and alter ego trusts

As their name suggests, life interest trusts create interests in assets to be enjoyed by beneficiaries during their lifetime.  The original beneficiaries during their lifetime (settlor, one or both spouses) of these trusts should be the only ones entitled to receive all income or get the use of the capital of the trust.  These trusts are usually put in place for other than tax considerations and generally tax neutral.  They are commonly used in estate planning.

 

There are spousal, alter ego and joint spousal trusts

  • Spousal or common-law partner trust is a trust for the exclusive benefit of the taxpayer’s spouse. Though a spousal trust may be created during the life of a spouse transferring assets into the trust, they are usually created under a will as Testamentary Trusts.  Properly structured, they will provide for spouses during their lives and ensure desired distribution after their death;
  • Alter Ego trusts may be created by individuals of 65 and older for their own benefit, mostly to protect the assets and avoid variation of desired distribution on death;
  • Joint spousal trusts are created by individuals who are 65 and older for the benefit of the settlor and the settlor’s spouse. These trusts are commonly used by blended families, as it provides for both spouses during their lifetimes and ensures desired distribution after their death. 

You can find additional information on our blog.

As for anything in life, there are benefits and drawbacks.  While you are the only one who can decide whether to use them, Granville Law Group can advise you on the advantages and drawbacks, assist you in your analysis and decision making.

Some considerations:

  • Capital property can be contributed tax-free to these trusts (income tax), but real estate transfers may be subject to property transfer tax;
  • Tax deferral to the time of death of the surviving spouse (spousal), settlor (alter ego) or last to die (joint spousal), but use of an alter ego or joint spousal trust may result in increased tax liability on death, as gains realized in the trust cannot be offset by losses or unused exemptions of the settlor or their spouse in their final returns;
  • Protection from possible abuse by greedy relatives, but may be attacked by creditors;
  • Capital may be left to residual beneficiaries of choice;
  • Not subject to probate.

Contact Granville Law Group and schedule a free, 30-minute consultation with our lawyers. Call us at 604-669-6580 

Granville Law Group Life Interest Trust

Frequently Asked Questions

1. What is a life interest trust?

A special life interest trust allows a settlor to transfer the asset to the trust for the benefit of the named persons but retain control over that asset. Only the settlor (and a spouse if it is a spousal trust) is entitled to receive income or use an asset during their lifetime.  Spousal trusts are established under the will, joint spousal trust and alter ego trust are established during the settlor’s lifetime.

2. What are the special rules that apply to these life interest trusts?

Capital assets may be transferred into the trust without tax consequences.

3. Are there age requirements?

Yes, the settlor must be at least 65 years old to be able to transfer the capital assets without immediate tax consequences.

4. Can one transfer real estate into such a life interest trust without immediate tax consequences?

The rules that allow transfer of the capital property without immediate tax consequences are under the Income Tax Act. Other legislation applies to the real estate transfers – such as property Transfer Tax Act in BC that still applies.  Every transfer shall be specifically considered to make sure it will be beneficial and aligns with the goals of the settlor.

5. Who can benefit from the property transferred in a life interest trust?

Only the settlor (and his spouse) is entitled to the income generated by the trust assets and to any capital of the trust.

6. Are there residency requirements?

Yes, the settlor, original trustees and original beneficiaries must be Canadian residents.

7. Can the assets be taken out of the life interest trust?

Yes, the assets may be rolled out back to the settlor.

8. What are the benefits of these life interest trusts?

Avoidance of compulsory succession, ability to provide for disabled. While all the trusts are subject to 21-year rule, these special life interest trusts are not subject to it during the lifetime of the settlor.  The 21-year period starts to run after death of the settlor.

10. How do I set up a life interest trust with Granville Law Group?

You can set up a life interest trust by consulting with Granville Law Group, where legal experts will guide you through the process according to your estate planning needs.