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Five smart ways to transfer wealth to your children, grandchildren


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By: Renée Sylvestre-Williams

The idea that wealthy parents or grandparents leave money to their kids or grandkids in their will is becoming outdated.

So says Ethan Astaneh, wealth advisor | client relationship manager at Nicola Wealth in Vancouver. While money can definitely be passed down via wills and estates, families should consider other methods, such as monthly payments or annual cash lump sums, insurance policies and trusts.

These days, it’s about passing wealth on to younger members of the family while you’re still alive to see them enjoy the benefits, Astaneh says.

Cash lump sums

One of the most popular forms of wealth transfer is gifts of cash, and often that means helping children purchase their first home. “The big one right now is assisting children with getting into the real estate market,” Astaneh says.

Other options include monthly, biannual or yearly lump sums. These gifts can help younger members of the family by providing a solid financial cushion but without giving enough money that they stop working. He says he’s seen sums ranging from $50,000 to $200,000 gifted annually.

The pros of giving cash, apart from the enjoyment of seeing your children use the money, is that you can give it without paying taxes. It also reduces the size of your estate upon death and the amount of tax that needs to be paid on it.

Trusts

Another common form of transferal is via trusts, says Paula Lester, senior trust advisor with Raymond James Trust in Ottawa. “Trusts are being used less for tax savings,” she says. “They’re being used more for control and protection.”

One way they are used to pass on wealth is if the beneficiaries are children. “If it’s large sums of money, [parents or grandparents] may want to phase the child in over a period of time with spaced out lump sums, or they want to just protect the money for a certain period of time for the child.” Another reason is if the beneficiary is vulnerable or disabled.

Another form is the spousal trust. “Actual spousal trusts have a special tax designation where, if you fit the criteria of these qualifying spousal trusts, you can actually roll over assets into it.” The benefit is that taxes are deferred until the spouse dies.

Trusts also work for blended families, says Lester. Money and assets are left to the spousal trust, which the living spouse has access to – not necessarily the capital, but the income. Since the trust is dictated by the deceased person’s will, it can be set up in a way that while the living spouse has access, he or she can’t pass it on to any children who were brought into the relationship, but it can be passed on to any beneficiaries, including children who were born between the deceased and the spouse.

The disadvantages of having a trust, apart from the cost to establish, register and administer it, is that registered assets such as RRSPs and RRIFs can’t be placed in the trust without deregistering them, which comes with hefty tax penalties depending on the amount in the plans.
Insurance
This is probably one of the last remaining ways to pass money intergenerationally without paying tax on it, says Scott Dickenson, principal of client service at Northwood Family Office in Toronto. He says that generally, the calculation for purchasing a policy is to determine approximately how much money the recipient is going to need for the rest of his or her life, and then add some buffer to that, because you never know what’s going to happen, such as a serious health crisis.

“[From there], it’s about defining the rest of your money as, ‘This is not for me, this is for someone else,’” Dickenson explains. That someone else might be a charity, or it might be future generations.

He says this is an option if you have a pool of cash, but the issue is that most people don’t – they have investments such as stocks, private assets and real estate. “Obviously, if those assets have gone up in value since you purchased them, there’s a tax bill associated with the transfer.”

Another option is purchasing a life annuity for a child. This product guarantees a regular income for the child’s lifetime. Lester says they can work if the amount of money is small, like $500,000 or less, but they don’t offer a lot of flexibility. If the sums of money are bigger, trusts can be a better option.

Transferring properties and stocks

When asked, all the advisors said that while it can be done, transferring real estate and stocks to younger family members can lead to capital gains taxes.

Another option is to have your children listed as joint owners of a property, but, says Astaneh, that leaves the property open to their creditors. Lester says that putting property or stocks in a trust offers credit proofing.

Experiences

Sometimes parents and grandparents want some family time, and the best way to do that is to apply their wealth toward experiences. Astaneh says families who have already written cheques toward first homes might shift to spending money on family vacations.

“So everything about it is a gift,” he says. “The difference is that you’re not helping them buy an asset, you’re actually helping them cover an expense.”

A few final notes

When it comes to transferring wealth, advisors say it’s important to keep several things in mind.

First, says Lester, don’t let tax efficiencies dictate the best ways to pass on wealth. While taxes are important, you should also consider the amount of wealth that is being transferred, as certain products may not make sense to include in your estate planning, she says.

The other is to start early. Astaneh says people in their 50s have begun the process because their children are or are close to becoming adults, so the beneficiary bridging process can start.

“[Estate planning] is not something that you can just flip a switch and get it done because you’re typically dealing with assets that require management, and there’s some skill involved there,” he says. It takes time to understand what’s involved in the estate and how to manage it.