You want your children to benefit equitably from your estate – and you want your legacy plan to include distribution methods that minimize taxes and fees while passing on maximum value to your beneficiaries. There are four basic estate distribution methods to choose from and each has advantages and disadvantages:

  • Gifting assets before death
  • Inter vivos trusts
  • Distributing assets through your will
  • Distributing assets on death outside your will

Each of these options requires careful consideration but let’s look inside the ‘gifting option’ because it could lead to an unintended reduction in your child’s inheritance.

Generally speaking, when you gift assets by passing them to your beneficiaries while you are still alive your estate can usually avoid certain administration and probate fees in common law jurisdictions. However, a capital gain may result when you transfer capital assets worth more than you paid for it – meaning you would pay the taxable portion of the capital gain. Typically, any future growth in the value of the gifted asset will be taxed in the hands of the recipient – except in cases where you gift income-producing property to your spouse or minor children, in which case the income may be attributed back to you. Also, by gifting the asset to someone else, you lose control of it.

Let’s say that instead of ‘gifting’ an asset to your child, you decide to provide money they can use now to help with buying a home or for any other reason, or as an advance loan on their future inheritance. In your will, you should clearly state how you wish that ‘loan’ to be treated at the time of your death: Forgive it, demand repayment, or have the amount of the loan deducted from that child’s share of your estate.

If your choice is to reduce your child’s share of your estate by the amount of the ‘loan’, you must keep careful records of the amount(s) you provided to your child. If your choice is to provide a ‘living’ gift with no strings attached, leave explicit directions to that effect in your will, otherwise the loan or gift may be considered an advance on the child’s inheritance which will result in a reduction in the amount of that inheritance.

It’s also a good idea to formalize any financial transactions with your child. A formal ‘promissory note’ proves that your child received ‘borrowed money’ and can help to protect the amount of the ‘loan’ or anything purchased with it (such as a home or property) from creditors or in the event of a marriage breakdown by assuring the amount of the loan must be repaid to you before your child’s assets are attached or split.

You want your legacy to be left exactly as you wish – that’s why you should take the time to talk with your lawyer or professional advisor.

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.

Contact David Brown at 250-315-0241 or at [email protected] to book your appointment.