Alter Ego Trust — Transfer Assets to a Trust During Your Lifetime to Avoid Probate

What Is It?

An Alter Ego Trust (AET) is a type of inter vivos (living) trust available to Canadian residents who are 65 or older (since January 1, 2000). Under the Income Tax Act (s. 73(1.01)), assets can be transferred into an AET at their adjusted cost base (ACB) — meaning no capital gains tax is triggered by the transfer. The settlor (the person creating the trust) retains full control over the trust assets and receives all income during their lifetime.

On death, the trust assets pass directly to named beneficiaries without going through the estate — bypassing probate entirely and avoiding estate administration taxes (which can be up to 1.5% of estate value in Ontario).

Why Avoid Probate?

Ontario Estate Administration Tax (EAT):

• 1.5% of the value of all assets passing through the estate (i.e., requiring probate)
• On a $1,500,000 estate (a modest Toronto home plus a portfolio): approximately $22,500

Other costs of probate:

• Delays (3–12 months or more for complex estates)
• Privacy loss — probated wills become public documents
• Creditor claims can be made against the estate during administration

An AET removes assets from the estate entirely, eliminating these costs and delays.

How an Alter Ego Trust Works

1. Create the trust. You (settlor) work with an estate lawyer to create the trust deed, naming yourself as trustee (maintaining control) and naming beneficiaries who receive the trust assets after your death.
2. Transfer assets at ACB. Assets are rolled into the trust at cost — no capital gains on the transfer. The trust holds title to the assets going forward.
3. Maintain control during your lifetime. As trustee, you can manage, sell, or reinvest the trust assets exactly as you would personally. You receive all income from the trust. No one else may receive trust income or capital during your lifetime.
4. On death, assets distribute to beneficiaries. The trust pays the 21-year deemed disposition (capital gains on any accumulated appreciation) and distributes remaining assets to beneficiaries as specified — no probate required.

Key Conditions for AET Status

• You must be 65 or older when the trust is created
• Only you may receive trust income or capital during your lifetime (alter ego means you and the trust are effectively the same person)
• If any other person benefits during your lifetime, the trust loses AET status and capital gains are triggered retroactively

What Most People Don’t Know

• AETs are a probate-avoidance strategy, not a tax-reduction strategy. The capital gains that were deferred on transfer are ultimately triggered on death (the trust is deemed to dispose of all assets at FMV at death). The tax deferral is until death, not elimination.
• The trust can hold a primary residence — but you cannot claim the principal residence exemption in a trust. Consider whether the capital gain on the home at death (inside the trust) may exceed the probate savings.
• Land transfer fees may apply when transferring real estate into the trust. In Ontario, transferring real property into an AET is typically exempt from Land Transfer Tax (as a transfer to a trustee with no change in beneficial ownership), but confirm with a lawyer.
• Control without probate — unlike joint tenancy (another probate avoidance strategy), an AET allows you to control who receives the assets and prevents the automatic survivorship rights that come with joint tenancy. It also avoids adding someone else’s name to your property with attendant risks.

Frequently Asked Questions

Sources

• Income Tax Act — s. 73(1.01) (Alter Ego and Joint Partner Trusts)
• CRA — Trusts Guide (T4013)
• Ontario — Estate Administration Tax
• Society of Trust and Estate Practitioners Canada