Gifts: giving and getting
‘I’m getting an inheritance’; giving to your children
It’s a day filled with challenges and opportunities – a loved one has died, and you realize you’re getting an inheritance.
To help you make the most of that inheritance, here are some suggestions you may find helpful:
• Understand what you’re getting. Is your inheritance in cash or investments that are liquid? Maybe you’ll be receiving tangible assets such as land, buildings or art that may take time to sell or that you will want to retain. Has the inheritance been bequeathed directly to you or will it be held in a trust that you do not control?
• Stop and take stock. Draw up a budget of your immediate income needs and your future income and capital needs based on your goals and dreams. Ensure proper asset allocation – meaning that money you need in the near future should not be placed in an investment that locks it in for a long time or that would be subject to redemption fees should you need the funds before the “locked-in” period expires.
• Repay non-deductible debt. Use some or all of your inheritance to repay debt on which the loan interest is not tax deductible. Start with debt that carries the highest loan interest rate.
• Top it up. If you have investments held within RRSPs or TFSAs with unused carry-forward room, fill it up.
• Send your inheritance to school. Contribute to investments held within RESPs to pay for your children’s expensive (and necessary) post-secondary education.
• Invest in your retirement/estate. Look carefully at tax-advantage wealth-accumulation vehicles such as Corporate Class Mutual Funds (that allow you to switch between different investments without triggering capital gains at the time of the switch) and Permanent Life Insurance (if you need it) that could provide tax-free funds at a critical time or a source of investment income to replace an income that is no longer there.
• Know your relationship rules. In many provinces, gifts and inheritances are exempt in the case of separation or divorce. But – if you invest your inheritance in joint names with your partner or in a family home or cottage, or use the funds to pay down debt on jointly held property and then separate, the assets may become fully sharable. You may want to keep property and other investments separate from other family assets.
Giving to your child
You want your children to benefit equitably from your estate – and you want your legacy plan to include distribution methods that minimize taxes and fees while passing on maximum value to your beneficiaries. There are four basic estate distribution methods to choose from and each has advantages and disadvantages:
• Gifting assets before death
• Inter vivos trusts
• Distributing assets through your will
• Distributing assets on death outside your will
Each of these options requires careful consideration but let’s look inside the “gifting option” because it could lead to an unintended reduction in your child’s inheritance.
Generally speaking, when you gift assets by passing them to your beneficiaries while you are still alive your estate can usually avoid certain administration and probate fees in common-law jurisdictions. However, a capital gain may result when you transfer capital assets worth more than you paid for it – meaning you would pay the taxable portion of the capital gain. Typically, any future growth in the value of the gifted asset will be taxed in the hands of the recipient – except in cases where you gift income-producing property to your spouse or minor children, in which case the income may be attributed back to you. Also, by gifting the asset to someone else, you lose control of it.
Let’s say that instead of gifting an asset to your child, you decide to provide money they can use now to help with buying a home or for any other reason, or as an advance loan on their future inheritance. In your will, you should clearly state how you wish that loan to be treated at the time of your death: Forgive it, demand repayment, or have the amount of the loan deducted from that child’s share of your estate.
If your choice is to reduce your child’s share of your estate by the amount of the loan, you must keep careful records of the amount(s) you provided to your child. If your choice is to provide a “living” gift with no strings attached, leave explicit directions to that effect in your will; otherwise the loan or gift may be considered an advance on the child’s inheritance which will result in a reduction in the amount of that inheritance.
It’s also a good idea to formalize any financial transactions with your child.
– From the Investors Group