It’s true what they say, there are two things you can’t avoid in life: death and taxes. Not exactly fond of the idea of handing over more than your fair share of taxes to the tax department? We have some good news for you. There are other ways to ensure that more of your investments and properties accumulated (the sum of your life’s work) end up in the hands of your loved ones instead of Revenue Canada. This may be something you are thinking more seriously about. Particularly if you are recently divorced and you no longer have a spouse to leave your assets to. Let’s discuss the top 5 strategies to pass on your assets to your children while minimizing the tax bite.
1. Gifting Assets
Cash is easier to gift that you think
It is often a little known fact that gifts of cash or property are tax-free gifts that can be passed on to your children or grandchild. By utilizing a deed of gift document you simply declare the intention is to place the assets in the recipient’s hands without any expectation to collect a loan repayment for the value of the gift. This is in order to offer clarity on death and prevent and future legal disputes.
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2. Family Trust
Dealing with spendthrift children
Are you leaving a significant gift? Concerned that your gift may be squandered by your darling son or daughter or -worse yet their spouse? Setting up a family trust should be considered. One of the many benefits of a family trust is that the trust document can outline how much, how often, and under what terms your children will receive the assets that are contained in the trust. Another benefit: assets that are apart of the trust are not considered family property. Should your heirs marry and your goal is to keep the asset in the family, this can be considered. However, once they receive the proceeds of the trust it is advisable that the keep the funds in a separate account. If they wish to continue to protect the asset.
3. Alter Ego Trust
Check the math to ensure you can afford the gift
If your scenario is you would like to give assets to your family but are not sure if you can afford to, then the first step would be to address those issues. Speak to a financial planner and do the math around lifestyle costs in retirement assuming a conservative rate of return. You will also want to factor in care costs should you need assistance with the activities of daily living.
Once all of the above is addressed, if you have funds leftover and you are sure you don’t need it for your retirement, an alter ego trust may be a good option. This type of structure can be costly to set up and may not be worth it unless the math works. The benefit of Alter Ego Trusts is that you can have your assets contained in the trust during your lifetime for the benefit of providing income for yourself since you are the beneficiary owner and trustee. On death, the trust bypasses your estate and the remaining proceeds can be divided up quickly by heirs if you name them as your replacement trustees. This may save your estate time and money.
4. Joint Accounts
If you help your son or daughter with paying the bills and you want to set up an account to make it easy to move funds back and forth into the account, a Joint account may be another strategy to gift funds to your loved one. The key to this strategy is to ensure funds transferred to this account are seen as a gift to the secondary account holder so that there are no legal disputes on death.
5. Thinking Through the Implications of Gifts
Not all gifts are created equal in Revenue Canada’s eyes
Gifting your principal residence has different tax implications than gifting your cottage. Gifting a TFSA account is not the same as gifting an RRSP account when on death or during your lifetime. It’s important to think about the tax implications on the gifts you want to pass on to your loved ones and look at scenarios to reduce the tax burden. Consult an accountant, and financial planner to help you if you are not sure how to go about this. Having experts working on your behalf is often the best approach. This will allow you to focus on seeing your children use the gift you have offered to fuel their dreams.