There are two different types of personal trusts referred to in the Income Tax Act: Testamentary trusts and inter vivos trusts (Inter vivos literally means “among the living”).
Testamentary trusts arise out of or on the consequence of the death of an individual and an inter vivos trust is any other personal trusts that are not testamentary trusts. Note however that upon the death of the settlor, an inter vivos trust does not become a testamentary trust.
Given all personal trusts can be classified as either testamentary or inter vivos, all forms of personal trusts fall within either of these two meanings. For example, a spousal trust or a trusts established for a child’s education can be either testamentary or inter vivos while other forms of trusts may only be inter vivos.
A spousal trust can be created out of an estate at a testamentary trust or during the life of the settlor as an inter vivos trust. These trusts may be created to address situations where the surviving or beneficiary spouse may not be capable of managing a set of assets or to preserve the original intent of the settlor. For example, if the settlor owned a successful business the shares of the business could be placed in a spousal trust to provide an income to the beneficiary spouse and assign management of the shares to a trustee.
Assets placed into a spousal trust are rolled over tax free and there is no deemed disposition upon the transfer. However, to qualify as a spousal trust and the tax free rollover, the trust must allow the beneficiary spouse to receive all of the income from the trust. At the same time no other person may benefit from the income or capital of the trust prior to the death of the beneficiary spouse. In addition, the settlor spouse must be a resident of Canada (although the beneficiary spouse doe not need to be).
Alter Ego And Joint Partner Trusts
One of the basic elements of a trust is that it establishes a relationship where assets are transferred to benefit another. Alter ego and joint partner trusts are inter vivos trusts where the settlor establishes a trust for their own benefit. That is the settlor and the beneficiary is the same person. There are some conditions on the establishment of these trusts specifically:
- The settlor must be over age 65.
- The settlor is entitled to receive all of the income of the trust during the settlor’s lifetime (alter ego). In the case of joint partner, both the settlor and the partner are entitled to income until the last one passes away.
- No one other than the settlor (alter ego) or the settlor and the settlor’s spouse (joint partner) can receive or make use of the capital of the trust until the death of the settlor for alter ego trusts and the latter of either’s death in the case of the joint partner trust.
Assets may roll over tax free to these trusts but a unique feature is that there is no continued deferral of the deemed disposition after death. Upon death, there is a deemed disposition and the assets are distributed according to the provisions of the trust.
What is the purpose of these trusts? Alter ego and joint partner trusts are not included in the estate of the settlor and as a result are not subject to probate.
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