You may be planning to leave a legacy to your children, grandchildren or favourite charity when you pass away. But have you thought about gradually passing on your wealth during your lifetime instead? This strategy is called a living inheritance.
If you have excess funds beyond your income retirement needs and you’ve partnered with your financial advisor to assess your financial situation, the benefits of passing on your inheritance now may outweigh the negatives.
Planning to gift assets now?
Gifting in life allows you to support the people and causes you care about – helping your grandchildren pay for school or giving your children a down payment to help them buy their first home, for example. It feels good to see the impact of your giving firsthand. In fact, that emotion is actually backed by science; the act of generosity creates interaction between the parts of the brain that are responsible for feeling pleasure.
However, there are some potential issues to consider.
Financial risk
Review your current and anticipated financial needs with an advisor before you choose to gift in life. Without a strategic giving plan, gifting significant assets now may jeopardize your own financial security, especially if you encounter unexpected expenses or need the assets for your own use in the future.
Also consider the impact the gift may have on the recipient. This is particularly important if the child has special circumstances, for example if they are receiving government benefits for disability.
Lack of clarity on your intent for the gift
You might consider transferring an asset into joint ownership with an adult child, but it is very important to be clear on your intentions. This is a common consideration for family cottage planning, but it can create confusion and complexity on your death. Did you intend to gift half the asset to the child outright? Or were you simply transferring the asset “on trust” so they can help you with administering the property in the future? While the transfer may avoid probate issues on your death, conflict may arise if there are other beneficiaries of your estate. It is critical to put your intentions in writing.
Estate planning
By gifting assets before your death, you could potentially decrease the value of your overall estate that may be subject to taxation on death. This may help lower probate, executor and legal fees. Probate fee rates vary across the country – so depending on where you live, reducing or avoiding them by gifting in life may be an important part of your overall estate plan.
Make sure your lifetime gifting strategy doesn’t undermine some of your estate plan goals. For example, if you have intentions to give to charity or other individuals, you should ensure that you have the assets in your estate to do so. Note that probate fees are not applicable in Quebec.
Intergenerational transfer
By funding an insurance contract on the lives of your children, with your grandchildren as the beneficiaries, you can provide a significant benefit to them in the future, when they will likely have the greatest need.
Tax planning
Gifting in life can be used as a tax strategy to reduce your overall tax liability, especially if you have a high income or assets with significant potential for growth. However, be sure to speak with your tax advisor before choosing to make a gift so that you understand the tax implications. Tax implications vary, depending on the type of gift and how it’s used.
Here are a few examples:
| Money/cash | There is no applicable tax on gifts of money for either the giver, or the recipient. |
| Real estate | There is no tax payable on capital gains if you gift your principal residence. If you gift a second home/recreational property, capital gains are taxable. So, if you sell or transfer ownership of it now and realize a capital gain, you’ll be required to pay tax on it. |
| Registered Retirement Savings Plan (RRSP) | Funds withdrawn from your RRSP and gifted to a family member are taxable. |
| Tax-Free Savings Account (TFSA) | Funds withdrawn from your TFSA and used to make a cash gift are not taxable. |
Loss of control
Manage your expectations around giving. Once you gift an asset you effectively relinquish control over it because the recipient has the right to decide how to use or manage the asset – and this may not align with your intentions.
For example, if your child’s marriage or common-law relationship dissolves, a gifted asset may be co-mingled with marital assets and treated as marital property that is included in the calculation of asset division upon separation. To avoid this, before making the gift you should ensure that the couple has a cohabitation agreement, prenuptial agreement or marriage contract in place that excludes this asset if the relationship breaks down.
Family dynamics
Gifting an inheritance in life can sometimes lead to family conflicts or disputes, particularly if there is a perception of favouritism or unequal treatment among beneficiaries. Be sure to navigate these dynamics and communicate openly to minimize potential tensions.
Transmitting values with the wealth
Some parents may worry that passing on wealth to their children could diminish their drive to work hard and pursue their own financial independence. Helping your kids become financially literate from a young age, modeling a strong work ethic and discussing values and the purpose of the gift can help them understand the responsibility of wealth beyond personal consumption.
Plan before you give
Balance your own financial needs with your desire to give back. Speak with a tax advisor before implementing any gifting strategies, and work with your Richardson Wealth Advisor to assess how passing on your wealth now may impact your financial future.
