Reprinted with permission, from BMO Nesbitt Burns “NetWorth” newsletter, summer 2010
Is it Wise to Make Gifts to Adult Children?
By Adriana Kacir, Investment Advisor
Parents often want their adult children to benefit from their wealth today rather than having to wait for an inheritance. The decision to give to children must be made carefully after considering all the consequences and potential unforeseen events. Consider these factors:
- Loss of control over the funds or property once they are gifted
- Future change to your health or financial situation
- Exposure of the funds or property to the children’s creditors, spouses, or heirs
- Effect on the children’s work ethic or lifestyle
- Potential undue influence on you by the children to make the gift
- Effect on the distribution of your estate
- Income taxes
Below are some answers to the most frequently asked questions about gifts to children:
How can I help my child purchase a home?
You can avoid some of the above pitfalls by registering a mortgage against the property. The mortgage can be forgiven in your Will or offset against the child’s inheritance.
Will the gift be taxable?
In Canada there is no gift tax but there is capital gains tax if the gift consists of capital property with an unrealized capital gain. Capital gains tax will also apply if the capital property is sold to the child for less than fair market value.
Will my child’s spouse have a right to the gift in the event of marriage breakdown?
Each province in Canada has different rules that offer varying degrees of protection for property received by gift or inheritance. This protection may apply to a property claim on marriage breakdown, or to a claim against the estate of a spouse. However, the statutory protection may not be sufficient because there are many exceptions and they are strictly interpreted. In addition, children may move from one province to another, making it uncertain what the applicable law will be in the future. Transferring the gifted property to a trust is sometimes recommended. In addition to offering some protection from spousal claims, it can also prevent the child from voluntarily transferring the property to the spouse.
You may decide to re-examine your intentions to make gifts to your adult children once all the known and potential consequences are considered. As previously stated, a good option may be to create a trust so that the property being set aside for the children can still be used for the children’s benefit without complete loss of control. In addition, the trust may protect the property from those making claims against your children. Professional advice is essential if the trust route is chosen to ensure that it provides the appropriate protection for your circumstances and avoids certain tax traps. You should seek independent legal advice if you want to make large gifts to your adult children. A safe philosophy for gifting to children is never give away anything that you may need or want back. Remember, once the gift is made, there is no reversing it.
Your BMO Nesbitt Burns Investment Advisor can assist you in locating an estate planning specialist.