But there are pros and cons to giving during your lifetime says Elaine Blades, director of fiduciary products and services with Scotia Private Client Group in Toronto. It’s important to fully understand the implications to avoid any nasty surprises along the way.
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“There have always been those who are generous with their children along the way,” she says. “And while we may be seeing more cases of early giving now, many people are doing it for the wrong reasons and without adequate knowledge of the implications.”
Take Lee F. and her sister: When they were added to the title for the cottage owned by their parents, it was a win-win for all sides, or so it appeared at the time.
“We were added to the title almost two decades ago to reduce taxes and to make final transfer easier later on,” says Lee. “What we didn’t realize until the recent death of our parents was that taking them off the title triggered tax on capital gains. We had locked in the gains up to 1995 but had a tax bill for the increase in property value since that time.”
Lee admits that she also learned a lesson from the experience of joint ownership. She and her sister each have two children that could inherit the property, which would put it in the hands of four families. “I really don’t want to put my kids in that situation,” she says.
Instead Lee took a different approach to early gifting. Rather than passing on her share of the cottage to her children, Lee chose to give each child a sum of cash equivalent to the value of their portion.
“I remember what it was like to have a young family, a mortgage, and bills piling up. Getting a healthy sum of money in my late 30s would have relieved a great deal of stress. I can help my children now, when they need it most, and enjoy the rewards that go along with giving.”
There are other reasons for gifting early. Probate planning and income splitting are two. In Ontario, for example, on estates valued at over $50,000 there is a one-and-a-half-per-cent probate fee on assets in a will. If some of those assets are gifted prior to death they are not part of the estate, so probate fees don’t apply.
When income splitting, be aware of the tax implications, says Blades. For example, money given to an adult can be received tax-free. But that person is responsible for paying taxes on any interest earned. When money is given to minors, such as grandchildren, taxes on earned interest are paid by the parents.
Lee is fortunate: she can afford to give money to her children now. Along with her property assets, she has a secure pension that provides a guaranteed income for however long she lives.
But that’s not always the case, says Blades, who cautions about being overly generous. “One of the most important things to remember is that once something has been given away, you can’t ask for it back. People are living longer and may need more to cover the costs associated with aging or disability. Situations change. We just don’t know what the future holds.”
Susan Eng, vice-president of CARP, an advocacy group for aging Canadians, says “It is critical to be prepared should a catastrophic event arise. Health issues are not discriminating. And aftercare for a stroke or heart attack can eat through savings very quickly.”
Another concern is loss of control.
“Those retiring now have worked hard and saved. Their children are in a position to benefit. But care needs to be taken when giving up control of assets. We see situations where kids are taking ownership of property, moving in and taking over, leaving generous parents vulnerable,” adds Eng.