As a father, mother or grandparent who has done well in life, you have probably considered giving financial gifts to your adult children or grandchildren while you are still alive instead of, or in addition to, providing an inheritance to them when you are gone. There are certainly benefits to doing that -- for your beneficiaries … and for you.
For your family You’ll be giving them money when they most need it – to pay down a mortgage, to buy a larger house for a growing family, to pay for a wedding, to fund a post-secondary education, or for hundreds of other good reasons.
Your gift may also reduce your family’s annual tax load. If you are in a top marginal tax bracket, and you give money to your adult children who are in a lower tax bracket, any income that gift generates will be taxable to the children at their lower rate.
For you There are no tax restrictions on gifts to children (or others) while you are still alive so you can see your beneficiaries enjoy your gifts and gain insights from how they use them. This may help you firm up an estate plan for future gifting.
There are other financial advantages to giving while living. Although there is no inheritance tax in Canada, the financial gifts you give to your children may lower the value of your estate, and also reduce or eliminate capital gains taxes on your property deemed disposed immediately prior to your death. Any capital gain on the gifted property will be realized and taxable to you at the time of the gift, however in many cases your marginal tax rate will be lower in retirement than in the year of your death.
For your estate It’s not a universally good idea to avoid probate (the formal validation of your will and of the person who will act as executor of your estate) but gifting while living can reduce probate fees on your estate which can be high, depending on the province in which you live -- for example, Ontario probate fees (called an Estate Administration Tax) top out at 1.5% of an estate’s value.
Considerations Look carefully at all the aspects of giving while living, including:
- Your current net worth and lifestyle requirements as they are now and as they may be in the future.
- Future factors such as health risks that may strain your financial resources.
- Ensuring your “early inheritance” of money or property goes to the right person(s) (especially important in blended families).
You want to give while you live and you want to have sufficient financial resources to last for your lifetime. That takes careful planning – so before putting a bow on your gift(s) talk to your professional advisor.