Alter ego trusts: an answer to enhance creditor protection (Quebec edition)

For residents outside of Quebec, view our national edition.

Tax Managed Strategy 13

Alter ego, self‑benefit, and joint partner trusts have been gaining in popularity as a way to have creditor protection and offer a quicker response in the case of incapacity.

What are they?

Alter ego trusts are variants of an inter‑vivos trust, meaning they’re set up during your lifetime. You must be 65 or older and the sole beneficiary of all income or capital of the trust during your lifetime. You can appoint other beneficiaries, who’ll receive income and capital after your death. If the trust is established prior to age 65 (in which case it’s called a self‑benefit trust), assets must pass to your estate (rather than to the beneficiary of the trust) on your death.

A joint partner trust is similar except that both spouses or common‑law partners must be entitled to receive all the income of the trust and must be the only persons entitled to receive the income or capital of the trust. This continues until the death of the last spouse or common‑law partner.


Assets are transferred to one of the three kinds of trusts at cost, allowing you to defer taxation of capital gains until assets are sold or until your death. You may elect to transfer assets to the trust at market value, which can be advantageous if you have significant capital losses or if you transfer qualifying small business shares and want to take advantage of the capital gains exemption. Most trusts are subject to a deemed disposition of their capital assets every twenty‑one years, which can generate a substantial tax liability. With alter ego, self‑benefit, and joint partner trusts, there’s no deemed disposition until your death (unless you choose otherwise).

A trust’s assets aren’t part of an individual’s patrimony. In general terms, a transfer of assets in favour of a trust may, in some circumstances, protect against an individual’s creditors given that creditors of an individual often aren’t creditors of a trust. However, creditors of a trust’s beneficiary may be able to seize the assets distributed to a beneficiary by the trust. Therefore, in many cases, a trust is set up as a discretionary trust, which allows the trustees to choose whether to distribute assets to a beneficiary. Usually, creditors cannot force trustees of a discretionary trust to distribute its assets. Despite that, in some cases, creditors may be able to seize the personal rights of a beneficiary over future distributions from a trust and request the court to declare the seizure binding until payments to the beneficiary begin.

Many exceptions exist and it’s always best to consult with your legal advisor about a specific case. Take, for example, a transfer of assets to a trust while the transferor is insolvent (whether bankrupt or not). In a situation like this, you may argue that there’s a fraudulent disposition of assets and the validity of the transfer could be challenged, opening the door for the assets to be seized.

In Quebec, annuity (and life insurance) contracts combined with a proper beneficiary designation can provide creditor protection.

Assets held within a trust, on the other hand, aren’t considered assets of the individual and, therefore, may be protected from creditors. Procedures required to put rules of protection in place, in case of incapacity, could take several months. Alter ego, self‑benefit, and joint partner trusts can offer uninterrupted administration for the assets under management.

The downside

So, why doesn’t everyone set up one of these three kinds of trusts? As legal documents are required, initial setup costs could amount to thousands of dollars. Additional costs for accounting, filing tax returns, and potential trustee fees are ongoing and could be substantial.

Keep in mind that alter ego, self‑benefit, and joint partner trusts are living trusts and income is taxed at the top marginal rate. However, it’s possible to attribute the trust income back to you and have it taxed at your marginal tax rate. Also, any successor trust is an inter‑vivos trust, not a testamentary trust. Testamentary trusts (except for Qualifiying Disability Trust that are taxed at graduated rates applicable to individuals) and inter‑vivos trusts are taxed at the top marginal rate.

If you set up a self‑benefit trust (i.e., a trust set up prior to age 65), assets must be paid to the estate on death, and there’ll be no protection from creditors of your estate. If you set up a joint partner trust, assets can be paid to the named beneficiary of the trust on the survivor’s death, and there could be protection from creditors of the survivor’s estate.

Care must be taken when drafting a trust document. If it looks too much like a will, and assets are substantial or their disposition contentious, the document could be open to legal challenge.

Alternatives – insurance investment contracts

Both trust-owned and individually owned insurance investment contracts, also known as segregated fund contracts, offer certain capital guarantees not available with any other investment product. They also offer a wide range of family of funds, allowing you to choose the best option for your situation.

In Quebec, registered (RRSP, RRIF and TFSA) and non-registered investment contracts offered by insurance companies can potentially offer valid protection against creditors when either an irrevocable beneficiary or beneficiary of the family class1 is named. They remain viable options with substantially less cost and administration than a trust. So, if a trust isn’t appropriate to your personal situation, these contracts are (when the owner names an irrevocable beneficiary or when the owner’s married or civilly unified spouse, ascendant, or descendant is named as revocable or irrevocable beneficiary), after trusts, the only other available option. Furthermore, alter ego, self‑benefit, and joint partner trusts can’t own registered investments. The 2008 changes to the federal Bankruptcy and Insolvency Act provide some protection against creditors for RRSPs and RRIFs, only in the case of bankruptcy, but won’t cover deposits made in the 12 months before bankruptcy. One could think that this protection is enough, but many creditor issues may arise without them leading to bankruptcy. Holding your registered assets within an insurance company investment with a proper beneficiary designation remains the only available alternative.

Also, capital losses of an alter ego, self‑benefit, or joint partner trust can only be used within the trust, but capital losses of a segregated fund contract are allocated to you. This allows immediate application against other capital gains.

Ideal candidates

Investors should consider segregated fund contracts or insurance guaranteed interest contracts (GICs) as alternatives to alter ego, self‑benefit, or joint partner trusts if they want:

  • low costs
  • potential creditor protection
  • tax-efficient disposition of assets at death
  • the ability to set up a testamentary trust
  • capital guarantees on maturity or death

Take action

If you’re looking for those features in an investment:

  • Contact your advisor.
  • Decide how much you want to invest.
  • Name your beneficiaries and consider testamentary trusts.
  • Decide what funds or insurance GICs meet your investment goals.

Investment options with Manulife Investment Management

Manulife Investment Management provides a range of investments and services, including:

  • Segregated fund contracts combine the growth potential from a broad range of investment funds with the unique wealth protection features of an insurance contract. Through segregated fund contracts, investors can help minimize their exposure to risk through income, death and maturity guarantees, potential creditor protection features, and estate planning benefits, all from a single product or insurance contract.
  • Guaranteed interest contracts offer investors the benefit of a guarantee on their principal investment and from several different investment options that can diversify and add flexibility to their portfolio. GICs can be an ideal solution for conservative investors looking to help grow their wealth but want to minimize risk.

1 In Quebec, a family class beneficiary is any of the married or civilly unified spouse, descendants, and ascendants of the owner.

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. The Manufacturers Life Insurance Company is the issuer of all Manulife Investments Guaranteed Interest Contracts, and the Manulife Segregated Fund Contracts and the guarantor of any guarantee provisions therein. Age restrictions and other conditions may apply. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.

Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

MK1868E 08/20

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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