Estate planning can be a challenging process in the best of times. No one wants to face the reality of illness or death. The current pandemic forces us to face that reality. While most of us are in self-isolation, we have some downtime and some of us are filling that time with dealing with our “to do” lists.
When we think of estate planning, we often think about how we want to distribute our assets in our will. But one method of estate planning is to give assets away prior to death. If you have been fortunate enough to accumulate more wealth than you can possibly spend in your lifetime, you may want to consider giving some away now.
You may be considering large gifts to your adult children or other adult family members in your will. Making those gifts while you are alive, especially if you are facing a terminal illness, may be the best planning you can do. Assets that are gifted prior to death are not part of an estate so probate and probate fees don’t apply to them. Probate fees are quite high in some provinces- for example they represent 1.4% of the value of probate assets in British Columbia and 1.5 % of the value of probate assets in Ontario.
You may also be paying taxes at a high rate on the income generated by your assets. Perhaps your adult children are paying taxes at a lower rate and so from an overall family perspective, lower taxes will be paid on assets if they are gifted. Your adult children may have loans or mortgages which they could pay down or off with the gift and therefore save in interest costs.
With this gesture, you will also have the advantage of seeing the difference you have been able to make in the lives of your family.
There is no gift tax in Canada so you can give whatever amount you wish tax-free so long as it is cash or other property which has not increased in value. You do have to be careful though with property that has increased in value, like the family cottage or an investment portfolio. If you transfer those types of properties, you will have to pay capital gains tax on the increase in value. Because of the pandemic, the value of some of these assets may be at an all-time low so this may be a good time to transfer assets without a significant tax bill.
You also have to be aware that for assets like the family cottage or other real estate, there will be land title fees and property transfer tax in some provinces. Depending on the province where your cottage or real estate is located, the property transfer tax can be very high, especially, if your children or other family members are not Canadian citizens or permanent residents. There may also be family law considerations which will be specific to each province and advice may be needed with respect to those considerations.
As well, if you or your family members live in or have citizenship in other countries, particularly the United States, special tax planning advice with respect to giving assets may be required.
Finally, in making gifts, it is important to have legal advice to document your intention that the family member should receive the gift for themselves and not in trust for your estate or someone else, especially if the gift is to one and not all of your adult children. Gifting without documenting intention through a deed of gift or otherwise can lead to significant conflicts later on.
You must remember that in giving assets away and experiencing the joy of giving and perhaps the reduction of tax and probate fees, you still need to be very sure that you will not need the assets for yourself and your own care. Once it is given away, you can’t ask for it back. But in the right circumstances, gifting during your lifetime is a very effective estate planning tool.
The signing of documents and client identification has become more complicated since we are encouraged not to meet with clients directly during the pandemic. However, we are finding ways to manage these new complexities so we are here to help if you need advice about this type of planning or any other planning.
Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.