Planning your long-term giving may be the best gift of all to loved ones

By Sabrina Beaudoin, B.Sc, CFP, TEP – Trust and Estate Specialist

With the holiday season in full swing, many of us are searching for the perfect gifts for family members. Estate planning isn’t generally something that enters our minds. Yet this may, in fact, be the right time for planning to give both now – and later.

Giving while living

Many people consider an inheritance to be something that is passed on after death. However, one estate planning strategy is inter vivos gifting, that is, giving away some of your assets while you are still alive. You might do this for several reasons:

• Ability to watch as your loved ones enjoy their inheritance while you are still around by helping them get a head start on their own success and wealth-building – a trend becoming more popular as real estate prices soar across the country.
• Tax advantages: There is no gift tax in Canada and transferring assets may save on tax if the recipient is in a lower tax bracket than the donor.
  • Removing future appreciation in the value of the gifted property from your estate may also save on capital gains taxes.
• Reducing the size of your estate can also help reduce or avoid probate fees. Probate is calculated on the assets you own at death, so when you give away certain assets beforehand, they may not be included in the probate calculation.

 

Some questions to consider before giving away your assets:

• After the gift, will there be sufficient assets left over for you in the event of an emergency? Be sure to carefully plan for retirement, unforeseen health costs, and your overall financial position.
• What is the nature of the gift, and will there be conditions attached? Can the family cottage be sold, or is it to be kept in the family for future generations? Will there be multiple owners?
  • Co-ownership agreements between siblings or other family members can be set out. So can rules and expectations, such as how to handle expenses, use, disputes and/or consequences in the event of a death or divorce.
• What are the tax implications for the donor and the recipient?
  • Transferring investments or property could trigger capital gains to the donor or put the recipient in a higher tax bracket. Determine if a gift makes financial sense right now.
• If giving an asset to one child but not another, have you considered equalization? Fair does not always mean equal, and equal does not always mean fair.
  • For example, you may want to give one of your children a down payment for a home, but your other child is not looking to purchase any real estate anytime soon. The gift to the first child can be addressed in your will by a hotchpot clause, by which distribution of assets takes into consideration any previous gifts.

 

Joint ownership

Many people may consider transferring part of their assets to their children as joint owners, whether with Rights of Survivorship or Tenants in Common:

• What’s the difference? Joint ownership with right of survivorship (or joint tenants in the case of real property) means that if one owner dies, their share passes outside of their estate and is split between the remaining owners. Tenants in common means that if one owner dies, their share becomes property of their estate and is dealt with under the terms of their will.

 

We often see this strategy as “probate fee planning,” where children may convince their parents to transfer assets such as investments, a principal residence or a family cottage into joint ownership. It is important to note that this strategy should not be used primarily to avoid probate, without thinking about the intention of the gift. Before deciding to go with the probate-fee planning strategy, be aware that:

• All joint owners have immediate and full access – do you actually wish to give up this asset? Do you intend on eventually taking it back?
• The asset could become subject to claims of creditors, or of a spouse in the event of a marriage breakdown, of all new owners.

 

Also be aware of possible negative consequences from an out of order death, i.e., one child dying before the parent. The parent’s intention is often to split their estate between their children. If one child predeceases the parent, that child’s share could pass on to their own children. However, if property is jointly held and an intended beneficiary dies, the asset will pass by operation of law to the surviving owners. The remaining estate will be split with the surviving grandchildren, and this could mean a significant imbalance of asset distribution, even complete disinheritance for some. A similar scenario could arise where children are named as beneficiaries of a parent’s Registered Retirement Income Fund (RRIF) or Tax-Free Savings Account (TFSA).

The strategy also goes awry if it results in more tax payable than probate fees saved, such as if the children end up in a higher tax bracket than the parents. Or, if a principal residence has been transferred into joint ownership, the capital gains exemption may be compromised since multiple owners must now qualify. Children may have their own principal residences, so the gain on a home previously owned solely by the parents may now not be fully sheltered. This can have especially grave consequences if the parent lives a long time after the transfer and there is a large increase in value.

Charitable giving

Many people choose to donate to a worthy cause, either during their lifetime or at death through their wills:

• Donations have a tax advantage through the non-refundable tax credit. Only donations to registered charities will qualify.
• To encourage donations, Canada has a two-tiered system. Amounts up to $200 qualify for a tax credit at the lowest rate; amounts over $200 qualify for a credit at the highest tax rate. For this reason, you may want to take advantage of the carry-forward allowances (up to five years) to hit the cumulative amounts.
• Unlike donations made during your lifetime, where up to 75% of your net income for the year qualifies for the tax deduction, a donation gifted through your will can be up to 100% of your net income in the year of death, or in the previous year.
• Charitable donations do not have to be cash. You can also give stocks, bonds, mutual funds and life insurance. Made in-kind, these gifts eliminate capital gains taxation. The charity receives them at fair market value.
• In fulfilling these obligations, it’s important to consider the liquidity of your estate. Building in some flexibility to allow your executor to make decisions can help achieve optimal tax-efficiency.

 

Whether your intentions are driven by pure generosity or a wish to reduce your tax bill, the benefit to the charity is the same. How you choose to give, and why, is totally up to you.

Conclusion

Gift-giving, especially when it comes to passing on significant assets you have worked so hard for, can be quite complex and may lead to frustration. It’s critical to discuss options in advance to ensure all parties understand the tax and non-tax consequences, as well as considering the family dynamics. Legal advice should be sought, and other options explored. For example, if you want one of your children to help control or manage an asset, you could use power of attorney, written authorization for them to act on your behalf.

Don’t rely on your will alone to clarify your reasoning. Clear communication and documentation may seem to take the sparkle out of the gift but will preserve harmony later on and provide peace of mind.

To learn more, email us at info@ciccone-mckay.com or call us at 604-688-5262.

 

 

If you would like to speak with someone about your emergency account, please feel welcome to contact us at info@ciccone-mckay.com or 604-688-5262.