Rights & Money

How to Pass On Your Wealth Wisely

Giving some of your assets to family requires careful planning—and the same is true if you’re the one on the receiving end

By Olev Edur

It’s been called the biggest intergenerational transfer of wealth in history—between 2016 and 2026, an estimated $1 trillion in assets will have been transferred from one generation to the next in Canada. South of the border, the amounts are proportionately even greater: “In the United States, the figure has been estimated at around US$30 trillion, but now I’m starting to see estimates in the range of US$70 to 80 trillion,” says Lydia Potocnik, head of estate planning and philanthropic advisory services at BMO Private Wealth in Toronto.

An unusual aspect of this massive transfer, given our ever-growing life expectancy, is that retirees are not only the givers of this wealth but also, in some cases, the recipients—parents now in their 90s may well be giving assets to children in their 60s. The question for many is how best to transfer their existing wealth to their children and grandchildren or to charities, while for others, the question is what to do with the money they’re receiving.

“If you’re planning to make large gifts, then first and foremost, you have to think about yourself,” Potocnik says. “You have to ask yourself ‘What can I really afford to give?’ and then start looking at the tools available to you for doing so. You need to take a holistic approach because the transfer of wealth is not an isolated event; it’s part of your overall wealth, and age is just one factor in the equation. The amount you can part with at age 90, for example, is quite different from the amount you might be able to manage when you’re 65.”

In calculating how much generosity you can afford, income tax often plays a major role. That’s because in transferring certain assets, you’re deemed by the government to have sold them, and any increase in value during the time you owned them will be taxable in your hands. “We have no gift tax in Canada, but for the giver, there’s often a deemed disposition, and assets such as stocks and real estate are potentially subject to capital gains tax,” Potocnik cautions.

Giving to Adult Family Members

If you’re giving to adult children, you must consider their situation as well as your own. “If the child is married and the marriage breaks down, the asset or gift is potentially exposed to an equalization of the value of [matrimonial] property under the Family Law Act in your province,” Potocnik says. “Similarly, if the child has creditors, they could come after the asset. You may want to ensure that a marriage contract or co-habitation agreement is in place beforehand, so that the asset is not exposed to equalization.” And in the event that there are creditors who might seize assets to settle outstanding debts, Potocnik suggests considering preventive measures such as trusts.

You also need to take care when it comes to transferring ownership of a principal residence, because it may result in the loss of its tax-exempt status. “When it comes to Mom and Dad’s principal residence, there’s no capital gains tax upon its disposition,” Potocnik says, “but if the child already has another residence, they’ll have to pay tax on any future growth in the value of their share of the property.”

When giving to children, joint ownership is often used to reduce probate fees as well as estate administration hassles and delays, because jointly owned assets revert directly to the surviving owner without going through the estate. But the dollar value of this strategy depends, first of all, on the province—it can make sense in the high-fee provinces of British Columbia, Ontario, or Nova Scotia, but in other provinces or territories, probate fees are relatively small. And, of course, those same tax considerations will apply.

In addition, you have to make sure you’re creating the right kind of joint arrangement. If you want the property to revert to the surviving owner, the correct choice is “joint tenancy with rights of survivorship.” But some people mistakenly enter into a “tenancy-in-common” arrangement, not realizing that in this case, the property will revert to the original owner’s estate upon death. And, of course, you must consider whether the child can be trusted with this sizable gift.

Special Property Considerations

If there’s more than one child, then dealing with a large indivisible asset such as a cottage or a business can be troublesome. “Passing on the family cottage can pose particular problems,” Potocnik says. “There’s an interesting family dynamic involved, because cottages often have significant sentimental value, so you may not want to sell it—you want to keep it in the family.
“You could put it into an inter vivos trust [meaning while you’re still alive] to keep it in the family, although there still will be a deemed disposition, and capital gains tax will be applied on future increases in value every 21 years. Meanwhile, all the kids can share the property.”

In some cases, though, one or more children may not be as interested as others in keeping the cottage, and this could create a rift. “If you sell it to one child, there could be a tax liability, but you could use life insurance to cover that liability and help maintain equality,” Potocnik says. “But equal and fair aren’t necessarily the same thing. We get this a lot from people who own a business. Entrepreneurs need to be especially careful—if one kid is involved in the business and another isn’t, you need to ask what they want. If one wants it, you can give other assets to the other kids and use life insurance if necessary to make sure everyone is treated fairly.

“Permanent life insurance can help in the tax-efficient transfer of wealth because there’s no tax liability when it is paid out,” Potocnik continues. “If you give or sell your life insurance policy to a child, he or she can borrow against the cash value with no tax implications.” Life insurance is also useful in philanthropy: if you pay the premiums, you can get a tax receipt. This enables you to make a larger gift than might otherwise be possible.

In any case, Potocnik says, it’s critical to understand what your children really want. “Communication is so important,” she says. “Talk to the kids—what do they want and what’s important to them. If only one child wants the cottage, for example, that’s important to know.”

Giving to Minor Children or Grandchildren

If you’re giving a gift to a minor child or grandchild, there may be further tax considerations, because any income (including dividends but excluding capital gains) from a gift will be attributed back to you and taxed in your hands. “If the beneficiary is a child, then the arrangement may be subject to the attribution rules, so people often put the asset into a trust,” Potocnik says.

Another useful tool, when it comes to giving to young children (or more likely grandchildren), is the Registered Education Savings Plan (RESP). As suggested by the name, these plans are designed to provide for the cost of higher education; you contribute funds and, although you get no tax break for the contribution, the money can compound untaxed in the plan and then, provided the money is used for the child’s education, it will be taxed in his or her hands. Since the child will be a student, generally with very little income, the tax should be minimal.

“RESPs are definitely a good way to provide for a child or grandchild’s education, although there are certain limits on how much you can contribute,” Potocnik notes.

Giving to Charity

When it comes to philanthropy, you may be entitled to substantial tax credits in recognition of your generosity, as long as the charity in question is registered with the government. And you must be mindful of the limits: in most cases, for example, the credit applies only on gifts up to a limit of three-quarters of your annual income. But you may be able to use one of the many plans offered by financial institutions and some charities to minimize taxes while maximizing donations.
RBC Wealth Management’s Charitable Gift Program, for example, enables you to set up your own foundation to contribute annually to one or more charities of your choice. But unlike a one-time gift to those charities, a contribution to your own foundation can live on indefinitely and the foundation can be passed on for generations to come. If you have financial investments, a donation of securities may be appropriate: there’s no capital gains tax on securities donations, making this strategy highly tax-efficient.

Finally, if you’re fortunate enough to be on the receiving end of the wealth-transfer process, then you need to consider what to do with your new-found good fortune. Again, the first step should be to determine your own needs. If your income is relatively low, it may well be that you can use some or all of the proceeds to make your life more comfortable.

On the other hand, if your circumstances are such that you don’t need the added help, then all of the foregoing suggestions can apply in determining what you should do with the proceeds. Potocnik stresses that this includes the need to review the gift within the context of your overall financial and family situation.

“We always sit down with clients and do a complete wealth plan,” she says. “This helps you decide whether you should use the proceeds to meet your needs; if not, we provide guidance on how to invest it. You also need to look at the legacy you want to leave, whether that’s with your family or with charity.”