When an Alter Ego Trust Doesn't Actually Avoid Probate in Ontario

An alter ego trust is one of the more sophisticated tools in Ontario estate planning — a lifetime trust that lets an older individual hold assets in the trust's name while still benefiting from them personally, with those assets bypassing probate on death. When it works, it works well. The trouble is that an alter ego trust only avoids probate on the assets that are actually and properly inside it, and several common gaps can quietly leave it doing far less than the person who set it up believed.

Understanding where these trusts tend to fail is often more useful than understanding how they're supposed to work in theory.

What an Alter Ego Trust Is Supposed to Do

In general terms, an alter ego trust lets someone transfer assets — investments, real estate, private company shares — into a trust during their lifetime, while remaining entitled to the income and capital of that trust for as long as they live. Because the trust, not the individual personally, holds legal title, those specific assets are not part of the individual's estate when they die and generally do not go through probate.

Eligibility to set up this kind of trust depends on requirements under federal tax law, including an age threshold — the specific figure is a matter for your lawyer or accountant to confirm, since it is a tax-law eligibility rule rather than a general estate planning principle. What matters for this article is what happens after the trust exists.

Failure Mode 1: Assets That Were Never Actually Transferred In

This is the most common and most avoidable failure. Signing a trust document does not, by itself, move anything. Real estate needs a new deed reflecting the trust as owner. Investment accounts need to be re-registered in the trustee's name. Private company shares need proper share transfer documentation and updated corporate records. Any asset left in the individual's personal name when they die is simply part of their estate — the trust's existence changes nothing for that asset.

Failure Mode 2: Capacity Questions at the Time the Trust Was Created

Setting up an alter ego trust involves the same kind of legal capacity concerns as making a will. If the trust was created shortly before a decline in capacity, or under circumstances suggesting the person did not fully understand what they were signing, the trust itself can be challenged after death — putting the very probate savings it was meant to deliver back on the table.

Failure Mode 3: The Trust and the Will Don't Line Up

Most people with an alter ego trust still need a will for whatever assets remain outside it. Problems arise when the trust and the will are drafted without reference to each other — for example, the will's residue clause assumes an asset that is actually inside the trust, or the person who set up the trust later acquires new assets and simply forgets to add them. A trust is not a substitute for keeping your overall estate plan coordinated; it is one piece of it.

Failure Mode 4: Overlooked Ongoing Tax and Filing Obligations

An alter ego trust is a separate taxpayer that generally needs its own annual filings, and it is subject to federal tax rules — including its own deemed disposition rules, which for this type of trust are generally tied to the death of the person who set it up rather than to a fixed number of years — that a lawyer or accountant should confirm and calendar for the specific trust. Treating the trust as a "set it and forget it" document, rather than something that needs ongoing professional attention, is a common way these structures quietly stop functioning as intended.

Failure Mode 5: It Doesn't Shield Every Claim a Family Member Might Bring

An alter ego trust changes how assets pass on death, but it does not necessarily insulate them from every legal claim a spouse or dependant might otherwise bring — family law and dependant support rules can still be relevant depending on the facts. This is a fact-specific area, and anyone using a trust partly to manage a family law or blended-family concern should get advice specific to their situation rather than assume the trust alone resolves it.

Signs Your Alter Ego Trust May Not Be Doing Its Job

• [ ] You've acquired new assets since the trust was set up and haven't confirmed whether they were added
• [ ] Your house, investment accounts, or company shares are still titled in your personal name, not the trust's
• [ ] You haven't filed a separate trust tax return since the trust was created
• [ ] Your will hasn't been reviewed since the trust was signed
• [ ] No one has calendared the trust's periodic deemed disposition date

Frequently asked questions