Alter Ego Trusts, Joint Partner Trusts, and Revocable Living Trusts

Alter Ego Trusts, Joint Partner Trusts, and Revocable Living Trusts: Cross-Border Features and Tax Implications

Trusts are widely used in estate and tax planning to simplify wealth transfer, minimize probate, and maintain privacy. A trust is a legal arrangement where a trustee holds and manages property on behalf of beneficiaries. But how a trust is created, taxed, and treated varies significantly between Canada and the United States.

In this article, we’ll review three important types of trusts — Alter Ego Trusts and Joint Partner Trusts in Canada, and the Revocable Living Trust in the United States. We’ll also expand on what happens when a grantor, trustee, or beneficiary moves across the Canada–U.S. border, and the reporting obligations that follow.

Categories of Trusts

Inter vivos trusts: Established during a person’s lifetime. Examples include alter ego trusts, joint partner trusts, revocable living trusts, bare trusts, and non-grantor trusts.

Testamentary trusts: Created on death, usually through a will.

1. Alter Ego Trust (Canada)

Definition and Features:

• Available only to individuals aged 65 or older.
• During the settlor’s lifetime, only the settlor can receive income or capital.
• Transfers of assets into the trust do not trigger immediate capital gains tax.
• On the settlor’s death, a deemed disposition occurs, creating taxable capital gains.
• Assets pass outside of probate, improving privacy and efficiency.

Use Case:
Best suited for individuals who want probate avoidance and asset management in case of incapacity, while retaining full benefit of their assets.

Cross-Border Issue:
There is no spousal rollover in an Alter Ego Trust. If the settlor or trustee moves to the U.S., the trust may become a U.S. trust, and the trustee may become subject to U.S. reporting obligations. The settlor (if U.S. tax-resident) could be taxed as if the trust were a foreign trust.

2. Joint Partner Trust (Canada)

Definition and Features:

• Available when the settlor is 65 or older.
• Both spouses or common-law partners can receive income and capital.
• The deemed disposition occurs only upon the death of the last surviving partner, deferring tax longer than an Alter Ego Trust.
• Assets avoid probate in both spouses’ estates.

Use Case:
Designed for couples, especially where deferral of tax until the second death is desired.

Cross-Border Issue:
If either spouse or the trustee becomes a U.S. resident, the trust remains Canadian for income tax purposes and may also become a U.S. trust and trigger U.S. compliance filing requirements. A U.S. spouse could be treated as the owner of a foreign trust and required to file Form 3520 and Form 3520-A annually.

3. Revocable Living Trust (United States)

Definition and Features:

• Created during an individual’s lifetime.
• The grantor can amend, revoke, or dissolve the trust at any time.
• The grantor often serves as trustee during their lifetime.
• Ignored for U.S. income tax purposes; income is reported on the grantor’s personal return.
• Becomes irrevocable at death, avoiding probate and ensuring continuity of management.

Use Case:
A popular tool in the U.S. to avoid lengthy and expensive probate processes, and keep the estate private.

Cross-Border Issue:
Canada does not recognize revocable trusts. If the trustee or grantor becomes a Canadian resident:

• The trust is treated as a Canadian resident trust, subject to tax at the highest marginal combined rate.
• Assets may be deemed disposed of when the settlor moves to Canada.
• Income is taxed in Canada at the trust level, creating a mismatch because the U.S. still treats it as flow-through to the grantor.
• This can cause double taxation, with limited ability to use foreign tax credits across jurisdictions.

Trust Taxation: Canada vs. United States

Canada:

• Most trusts are taxed at the top marginal tax rate for individuals.
• Rates vary by province: 53.50% in British Columbia and 53.53% in Ontario.
• Special inter vivos trusts like Alter Ego or Joint Partner Trusts defer tax until death of the settlor(s).

United States:

• Trust income is taxed at compressed progressive brackets.
• The highest federal rate of 37% applies to income above $15,650 (2025 threshold), plus applicable state taxes.
• Revocable trusts are ignored until death; income is taxed directly to the grantor.

Residency and Compliance

Residency rules:

• U.S.: A trust is resident if it passes both the court test (U.S. court has supervision) and the control test (U.S. person controls decisions).
• Canada: Residency depends on where the “mind and management” of the trust resides, or whether there is a Canadian-resident settlor or beneficiary.

Compliance obligations:

• U.S. person owning a Canadian trust: must file Form 3520, Form 3520-A, and potentially Form 1040-NR.
• Canadian resident with a U.S. trust: must file Form T3, Form T1135, and report under Canada’s expanded beneficial ownership disclosure (Schedule 15). Penalties for failing to file can reach $2,500 CAD per return.

Case Study: Moving with a Revocable Trust

Consider Jeffrey, a U.S. citizen who moved to Canada with a Revocable Living Trust that held his Florida condo and non-qualified taxable investments.

• In the U.S., the trust was ignored for tax purposes.
• In Canada, it became a Canadian trust, taxed at the top rate, and subject to T3 and T1135 filings.
• Patricia still had to report income personally in the U.S., while Canada treated the trust as a separate taxpayer.
• The result: a mismatch in foreign tax credits and potential double taxation.

Key Differences at a Glance

Alter Ego and Joint Partner Trusts in Canada, and Revocable Living Trusts in the U.S., serve similar estate planning goals: avoiding probate, ensuring privacy, and providing continuity. Yet their rules, tax treatments, and cross-border implications differ significantly.

For Canadians aged 65 or older, Alter Ego and Joint Partner Trusts provide probate relief and tax deferral. For Americans, the Revocable Living Trust remains the go-to tool for probate avoidance and privacy. But for cross-border families, caution is essential. A trust that works seamlessly in one jurisdiction can create compliance burdens, increased tax liability, double taxation, and reporting mismatches when the trustee or grantor crosses the 49th parallel.

Proper coordination with advisors on both sides of the border is critical to align structures with tax law in both countries, maintain compliance, and optimize outcomes.