Case Study: Alter Ego Trusts

Many of my clients are single and/or widowed. I recently was working with one of my long-term clients in regard to her estate plan. She is a widow and holds significant non-registered investments of roughly $2,600,000.

She was concerned about distributing her wealth to her designated beneficiaries in her will in a timely fashion and in such a way to minimize probate fees. 

Generally speaking, non-registered investments personally held at death are subject to probate fees. Probate fees are a function of the value of an estate. In this case, probate fees on an estate worth $2,600,000 are roughly $36,000 (e.g. roughly 1.40% in BC).

In late 2013, I collaborated with my client and her lawyer and we came up with a plan to achieve her estate planning objectives.  The plan involved setting up what is called an alter ego trust and moving her existing non-registered investments into the alter ego trust. 

The primary purposes of establishing an alter ego trust include:

1. Avoiding the cost to the estate of probate fees;
2. Avoiding the time and expense of applying for a grant of letters probate in the Supreme Court.

By setting up an alter ego trust, the payment of the probate fees can be avoided. Furthermore, the non-registered investments were rolled into the trust on a tax-deferred basis. This means, at the time of the transfer into the alter ego trust, an income tax liability was not created by unrealized capital gains or losses.  

The end result of the collaboration with the legal professional is a significant savings to the estate which would ultimately end up in the hands of the beneficiaries. 

The cost of establishing the trust was roughly $5,000.00. By establishing the alter ego trust, there is no need to apply for probate, so this cost will be offset by the savings incurred by the estate in not having to make that application.

The only other costs associated with establishing an alter ego trust involve filing an additional income tax return each year and this amounts to roughly $150 - $300 annually.