Consider the tax, lifestyle impact of giving money to loved ones now. It’s been said that providing for the next generation is the best way to judge how we’ve lived our life.

And while we understand 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 – so we can witness the joy and security we’re providing to those we love most.

Blake Linklater, financial security advisor with Freedom 55 Financial has the following considerations of why giving money to your family sooner may be better.

The Benefits of Giving 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 in life. However, there can be the more practical benefits of giving while you’re still alive:

  • The potential to save on taxes and fees.
  • Simplifying or reducing the size of your future estate – it may help to lessen or eliminate the burden of managing assets by others at a later time (especially with real estate or other investments).
  • Providing the next generation with an early inheritance to start a business or to invest now (and grow the size of your gift in the future).
  • Potential for avoiding estate administration taxes (also known as probate) and ensuring your privacy.
  • Reduce the potential for family conflict over your estate after you’re gone.

On death, the Income Tax Act considers you to have disposed of all your worldly possessions. This means your estate or heirs can be taxed on any income earned or accrued gains on your assets in the year of your death. The sudden tax burden can be quite considerable on large estates because the tax is often calculated at the top tax rate brackets. There may also be extra and unexpected expenses such as executor fees, accounting fees and/or legal fees).

Fortunately, advance tax planning can ensure your heirs are spared some of these costs to receive the largest gifts possible. Once the assets are in their hands (usually children or grandchildren over the age of 18), taxes on the future growth of the assets are their responsibility and typically levied at a lower marginal tax rate. Those tax savings for heirs of large inheritances can be substantial. Of course, for new graduates or homeowners, they can use your estate to pay down debt instead of producing tax-generating income, which would still put them in a more favourable financial position.

Happiness doesn’t result from what we get, but from what we give.

One of the biggest reasons to bestow your estate before you die is so your family and friends will enjoy it more while they’re younger and healthier. You get to see how your gift changes and improves their lives while you’re still alive. Of course, the counter to this is that you’ll have fewer assets for your retirement and the remainder of your life. This explains why planning is key: you want to ensure these assets aren’t needed to support any of your own future lifestyle or living needs.

Caution to the wise

As with any other gift – whether it’s a holiday present or a vast 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 have to be prepared to accept there’s no recourse if the recipient chooses to use the proceeds 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 payment. You can choose to leave your gift in the form of an annuity to provide smaller, more regular, guaranteed payments to last throughout their lifetime. This might be an ideal plan for those family members who may be susceptible to influence or irresponsibility. 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 bequest can help loved ones over time yet still honour your wishes. The information will help get you started for the conversations you should have with your advisor and tax professional.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.

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