Consider the tax, lifestyle impact of giving money to loved ones today
The next generation is the best way to judge how we’ve lived our life. And while we know how important it is to plan for retirement and to prepare our estate for our loved ones, sometimes we feel it would be much more rewarding and satisfying to pass along these gifts earlier – while we’re alive. This way we can witness the joy and security we’re providing to those we love.
Can inheritance be given sooner?
For most people, the emotional reward of seeing your loved ones enjoy the fruits of your lifetime of work is the biggest reason to give earlier. However, there can be the more practical benefits of giving while you’re still alive:
Potential to save on taxes and fees
In Canada, there is generally no inheritance tax, which means recipients of an inheritance, including an early inheritance, don’t have to pay tax on the amount they inherit. However, there are some important points to consider:
- Tax on transfer of property: There is a potential for capital gains tax where capital property is transferred to a family member. This tax is payable by the transferor (e.g., parent) of such property
- Capital gains tax: If you inherit property or investments and later sell them, you might be subject to capital gains tax on any increase in value from the time if inheritance. The tax is calculated based on the difference between the fair market value at the time of inheritance and the selling price.
- Income from inheritance: If the inheritance generates income (e.g., interest from a bank account), that income is taxable for the inheritance recipient.
- Gift tax: Canada does have rules around gift tax. However, if someone gives you a gift, there might be tax implications (e.g., income attribution rules), especially if the gift is income-producing (e.g., like a rental property).
Getting an early inheritance can sometimes make things simpler for your family when someone passes away. When you get an early inheritance, you might receive money or property while the person is still alive. This can help simplify the management of assets after they pass away because there would be less things to sort out (e.g., money, property, land). It means there may be less for your family to handle after the person is gone.
Give the next generation a head start
Giving the next generation an early inheritance can give them a head start in the game of life in various ways:
- Starting a business: Kids or grandkids can use the money they get from an early inheritance to start a business. They can follow their dreams and create something they love, which might not have been possible without the financial help.
- Investing: They could also use that money to invest. This means putting that money into things that grow over time (e.g., property, stocks, etc.) As these investments grow, they could bring in more money over time, helping the next generation financially in the long run.
- Learning responsibility: Managing an early inheritance can teach important life skills. Learning how to handle money wisely and make smart decisions early in life can set them up for a secure financial future.
Potential for avoiding estate administration taxes
Getting an early inheritance can sometimes help avoid estate administration taxes. When someone passes away their estate (all the things they owned) might have to pay taxes before it’s given to the family. If you get some of this money or property before the person passes away, there might be less left in their estate.
Getting an early inheritance can sometimes mean the family doesn't have to pay as much in taxes after the person is gone. It can help make things simpler for everyone.
Reduce the potential for family conflict
Getting an early inheritance can sometimes prevent arguments and conflicts in families in various ways:
- Fairness: If everyone gets a share early, nobody feels left out, so there’s less reason to fight.
- Clear communication: Talking openly about the early inheritance helps everyone understand the reasons behind it. When people understand, they’re less likely to be upset.
- Less pressure: Without the pressure of waiting for the inheritance, family members can focus on other things. It can help reduce stress and keeps relationships smoother.
- Shared decisions: When the family discusses the inheritance together, everyone can agree on how to use the money. The shared decision-making often leads to better understanding and harmony.
Can I gift a property through a living inheritance?
Yes, in Canada you can give someone a property while you’re still alive – it's called a living inheritance. This means you can give a house, land, or any property to someone you care about, like your children or family members, before you pass away. It’s also important to put their name on the title of the house or land. This makes them the legal owner.
Maintaining joint ownership is a good idea for you and the person(s) you’re gifting to for a few reasons:
- Avoiding probate: When the property owner passes away, joint ownership allows the property to automatically transfer to the other owner without going through probate. Probate is a legal process to validate a will. By avoiding probate, it can simplify things for the family after the owner’s passing.
- Shared responsibility: Joint owners share the responsibility for the property. This means both parties have a say in decisions about the property, including maintenance and selling it in the future.
- Avoiding disputes: Clear joint ownership can prevent disputes among family members about who rightfully owns the property.
You can speak with an advisor to understand all the details and make the best decision for your situation.
What should I say if my kids ask for their inheritance early?
When your kids ask for their inheritance early, it’s important to have a caring conversation to understand why they’re asking. You can ask questions like:
- Understanding their needs: I hear that you’re interested in your inheritance early. Can you tell me why? What are your plans for the money?
- Explain your perspective: I want the best for you. It’s essential to plan so that you can use the money wisely. What are your goals, and how do you plan to achieve them?
- Teaching financial responsibility: Managing money is a valuable skill. Have you thought about how you’ll handle the money responsibly? It’s crucial to plan for both short-term needs and long-term goals.
- Setting expectations: Let’s discuss your plans together. It’s important to consider how this might affect your future. What are your thoughts on balancing immediate needs and future financial security?
- Encouraging communication: I appreciate your honesty in discussing this. Let’s keep talking openly. What support do you need from me to achieve your goals responsibly?
Having these open and understanding conversations with your kids can help everyone involved make informed decisions about their financial future. It can also provide you (the inheritance giver) with concrete insights as to why your kids are asking in the first place.
What to keep in mind
As with any other gift – whether it’s a holiday present or a large fortune – once you’ve given it to someone else, you won’t have any remaining control over it and can’t get it back. This may seem obvious, but you must be prepared to accept there’s no option if the recipient chooses to use the inheritance in ways you disapprove.
You do, however, have several different options to ensure the longevity of your gift. Your assets don’t necessarily have to be given to beneficiaries in a lump-sum. You can choose to leave your gift in the form of an annuity to give smaller, more regular, guaranteed payments to last throughout their lifetime. This might be an ideal plan for those family members who you want to benefit from your gift over time.
Alternatively, you may also want to consider using a trust, which may provide additional control and protection of your gift. As you plan your estate, consider these possibilities for how your gift can help loved ones over time yet still honour your wishes.
In conclusion, giving an early inheritance can show your care and support for your family. It helps them in important moments, reducing worries, and building a strong foundation for their future.