Under section 104 of the Income Tax Act, RSC 1985, c 1 (5th Supp), a trust can qualify as an alter ego trust if the settlor is 65 or older at the time the trust is settled and the settlor is the only beneficiary entitled to receive income and capital payments until their death.
Alter ego trusts are primarily known for their pre-death capital gains tax benefits and as a way to avoid the probate process. From a practical perspective, alter ego trusts do not require the settlor to surrender full control of their property during their lifetime, which can be a risk when gifting a right of survivorship by transfers to joint ownership. For a discussion on what sort of property is suitable for an alter ego trust, see Suzana Popovic-Montag’s blog from March 2, 2026, on the topic.
Litigation Risks and Key Limitations
Alter ego trusts do not litigation-proof a deceased’s assets despite their ability to allow such assets to avoid probate. Case law shows that alter ego trusts can face many of the same disputes and legal challenges as estates.
For one, alter ego trust property can be “clawed back” to satisfy estate debts and expenses made payable by court order. For example, such assets are available for estate dependent support payments under subsection 72(1)(e) of the Succession Law Reform Act, RSO 1990, c S 26, and transfers to an alter ego trust could be treated as fraudulent conveyances made to avoid creditors (see Mawdsley v. Meshen, 2012 BCCA 91).
For another, alter ego trusts are exposed to the same validity claims any other trust would face – such as claims that they are invalid because the trust does not meet the three certainties or because the settlor was unduly influenced. Consider, in Slover v. Rellinger, 2019 ONSC 6497, the Court undertook a comprehensive analysis of whether a deceased testator was unduly influenced to make numerous wills, and to set up and later revoke an alter ego trust. The court found that the settlement deed of the alter ego trust was valid alongside one will, and the revocation deed was invalid alongside another will.
Furthermore, the execution requirements of an alter ego trust and of a Will differ despite similarities in nature. Easingwood v. Cockroft, 2013 BCCA 182 illustrates how this difference can introduce further complexity. Here, the British Columbia Court of Appeal found that an alter ego trust established by the attorneys for the incapable settlor was valid even though the trust effectively replaced the grantor’s will. The Court emphasized that an alter ego trust is, by nature, an inter vivos instrument rather than a testamentary one. The Court also noted that, British Columbia legislation did not contain the same express restriction on testamentary acts by attorneys that existed under Ontario’s Substitute Decisions Act, 1992, SO 1992, c 30, though similar restrictions on testamentary dispositions by attorneys still applied at common law (see paragraphs 45 to 49 of Easingwood).
Takeaways
While alter ego trusts can be an effective and flexible estate planning mechanism, they also illustrate how the scope of potential legal issues expands along with the availability of more complex estate planning options. Case law on alter ego trusts demonstrates the importance of not treating separate estate planning tools in isolation, whether that be a will, a trust, a gift of right of survivorship, or anything else.