Joyful senior couple toasting with wine glasses at a picnic, celebrating their secure retirement through effective trust planning.

Protect Your Prosperity: Using Trusts to Safeguard Your Retirement

March 13, 2023

Baby boomers, those born between 1946-1965 who make up roughly a quarter of the population[1], have experienced the largest period of wealth creation in history over their lifetime. As we move into the mid-2020s, this generation is entering a critical stage—retirement—which is initiating the greatest wealth transfer that Canada has ever seen.

Unfortunately, with advanced age comes a myriad of health conditions, including cognitive disabilities like dementia, which can leave aged individuals vulnerable—both physically and financially. According to the Government of Canada, financial abuse is the most common form of elder abuse in the country[2]. This begs the question: how is one to protect oneself and secure a financial future for retirement against those who would want to exploit potential vulnerabilities?

One answer is to use a trust. Many people have heard about the concept of a trust before (think “trust fund babies”) but assume it’s only reserved for the rich. We’re here to tell you that trusts are tools that anyone case use, and in many cases they’re one of the best options for securing your financial well-being as you enter retirement.

A refresher on trusts

As background, a trust is simply a relationship between several parties, where one person transfers property to another person to be held in trust, for the benefit of other persons.

You likely already know some of the benefits of using trusts, including access to specialized tax planning techniques that are used to preserve and create generational wealth. Just as important, however, are the many non-tax related aspects of trusts, including:

  • The preservation of privacy;
  • The ability to protect assets from various risks;
  • Flexibility in deciding how to allocate assets;
  • Providing for disabled persons; and,
  • Avoiding negative consequences from family conflicts

All of these affordances are what make trusts such an attractive vehicle for seniors.

Special trusts available to seniors: AET and JPT

Seniors have special entitlements under the Income Tax Act. One such entitlement is the ability to benefit from the use of an Alter Ego Trust (AET) and/or its counterpart, the Joint Partner Trust (JPT).

These special types of trusts provide the benefits of the more common discretionary trusts but provide additional benefits. In order to qualify as an AET or JPT, the following requirements must be met:

  • The trust must be created by a taxpayer who is a resident of Canada;
  • The taxpayer must be age 65 or older in the year the trust is created;
  • The trust must be created after 1999;
  • Only the taxpayer may be entitled to the income from the trust while they’re alive (if it’s a JPT, then only the taxpayer and their spouse may receive the income while they are alive);
  • Only the taxpayer (or their spouse/partner if using a JPT) may be entitled to the income of the capital of the trust while they’re alive; and,
  • An election out of the rollover rules has not been made

Strategies for using an AET/JPT

Transferring property without tax on the disposition

A sizeable benefit of creating a valid AET/JPT is that, upon the creation of the trust, the taxpayer may transfer property to the trust without triggering tax on the disposition (which would normally apply). Furthermore, that property can also be transferred to the trust at later date if the taxpayer wishes.

For example, you could transfer investments with accrued gains, such as investment portfolios, real estate or private company shares and continue to enjoy the benefits of ownership without immediately paying tax.

Avoiding the 21-year disposition rule

Another benefit of using AET/JPT’s is the ability to avoid the 21-year deemed disposition rule. For most other trusts, there’s a rule that requires there to be a disposition of all its assets at fair market value on every 21st anniversary of the trust, and any accrued gains would be subject to tax. AET/JPTs are exempt from this rule, thereby allowing its beneficiaries to enjoy their assets until their passing (or, in the case of a JPT, until both partners/spouses have passed).

On top of these non-tax benefits that these trusts offer, they also give you the ability to reduce or avoid probate taxes, avoid wills variation or support claims that would defeat your final wishes, and help you maintain control and protection of your assets for the duration of your life.

Trusts are attractive tools for many people looking to ensure they can live their golden years in comfort knowing their finances are secure. If you’re thinking about using trusts to protect your financial future, reach out to your DMCL advisor about our specialized trust and estate services and they’ll help you explore all the options available to you.

Article written by Edwin Yeung, CPA, CGA, TEP

[1] A generational portrait of Canada’s aging population from the 2021 Census (statcan.gc.ca)

[2] What every older Canadian should know about: Financial abuse – Canada.ca