Gifting wealth while living vs. through a Will upon death

When looking at wealth planning as a whole, many consider estate planning to be one of the most emotionally challenging aspects. For some, it comes down to a discomfort around thinking about death or worries about upsetting family members or creating conflict; for others, it’s generated from the uncertainty as to what their own future holds or complexities around how to handle certain family situations in a way that meets individual wishes and intentions. Unfortunately, while all of these underlying reasons function as deterrents from decision-making for many individuals, when viewed from a different perspective, they actually represent the exact reasons that estate planning is so important. Avoiding these important decisions, or making the wrong ones because of a lack of knowledge or professional advice, often increases the likelihood of disruptions to family harmony, increases the time and complexity to administer an estate, may result in higher taxes during lifetime and at death, and means your assets may not end up where you want them to.

Regardless as to whether you favour transferring your wealth during your lifetime or upon death, it’s crucial to follow a logical process that hinges both on appropriate and thorough planning and on effective communication. Approaching it via a structured process and with the right mindset will help ensure your intentions are realized and will encourage smooth and successful transitions.

Putting your potential needs first

Before embarking on any decisions about the timing for passing wealth down either during your lifetime or at death in your Will, or a combination of both, it’s crucial to first assess your financial situation, anticipate future potential needs, and identify the type of lifestyle you want to live in retirement. Simply put, you should be taking stock of all sources of income and assets and then comparing that with your objectives and requirements, taking longevity into consideration. A comprehensive financial plan may be very useful in this regard and should take place upfront to determine whether you will outlive your wealth resources and funds and to what extent. While the scope of a financial plan extends well beyond just estate and wealth transfer considerations, it does address some of the key questions specific to this area of planning, including:

• Can I retire when I want to and maintain my desired lifestyle?
• How can I ensure I don’t outlive my money?
• What might my future healthcare needs and costs be, and how do those factor into my overall plans?
• If I were to pass away unexpectedly, would my family be taken care of?
• How can I protect the value of my estate?

Helping to answer these questions and strategically plan for these scenarios is a central piece that enables you to then make informed decisions about when, how much and through what means to pass down your wealth.

However, despite the important role and high level of effectiveness of comprehensive financial plans, many Canadians don’t use them. In fact, it was found in the 25th Annual RBC RRSP Poll that 54 percent of men and 60 percent of women don’t have a financial plan, and these numbers suggest that many are leaving themselves vulnerable to potentially giving away their wealth too early or not having adequate or any plans in place that meet their intentions and objectives.

Beyond a financial plan, it may be worthwhile to speak with your professional advisor about other advice-based tools that may define, report on and provide potential options to meet your needs and objectives. For example, RBC Wealth Management now offers myGPS™, a proprietary tool that provides individuals with personalized direction in their wealth planning.

More information about this new tool can be found  in the Fall 2016 edition of RBC Wealth Management Services Perspectives magazine in the article, “An integrated approach to wealth planning with myGPS™.”

Passing down wealth during one’s lifetime

Through a comprehensive financial plan, if it’s been determined an individual has assets beyond the scope of what their certain and potential needs are during their lifetime, giving them away while living may offer some advantages. Those who favour passing down wealth during their lifetime may also do so for personal reasons that are often fuelled by family situations and circumstances. Many individuals feel strongly about assisting the younger generations in their family and seeing the benefits of their gifts. More specifically for some, the hope to see their successors start achieving ambitions sooner or be able to enjoy and use the assets more immediately often outweighs some of the more tangible advantages such as tax purposes or to spread out the costs of retirement. But even while the root reasoning may be more personal in nature, it’s important to look and understand the potential benefits of this approach from both estate and tax perspectives as well.

Reducing the size of the estate

Giving away assets during an individual’s lifetime may effectively decrease the value of the overall estate and thus reduce the amount of probate fees that would be due upon death. For some individuals, reducing probate fees is a priority as part of estate planning, but it’s important to understand the differences in probate fee rates across the various provinces and territories and whether the benefits outweigh other potential approaches (or can be effectively used hand in hand with other strategies). For example, residents of Ontario are subject to a high rate of probate fees, which could be as high as 1.5 percent of an estate depending on size, whereas other provinces such as Alberta and Quebec have much lower flat fees. In other words, in jurisdictions where the fees are much lower, reducing or avoiding probate fees likely won’t be a strong factor to consider as part of overall planning.

In jurisdictions where probate fees are much higher, strategies that help lower these fees may rank higher as a priority. As such, it’s important to walk through a cost/benefit analysis with a qualified professional advisor as part of the decision process.

Probating a Will

Probate fees for provinces and territories*

Often financial institutions will not release the assets of an estate to an executor unless they have received an official probate document. This general requirement by third parties is the main reason that executors obtain probate. Probate offers third parties a form of guarantee that they are transferring the deceased’s assets to the correct party.

* Probate fees for provinces and territories as at August 2016.

The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Wealth Management nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is furnished on the basis and understanding that neither RBC Wealth Management nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof.

Tax considerations

There are a number of tax considerations and potential implications that should be factored into the decision- making process for passing down wealth during an individual’s lifetime. In general, if individuals are holding onto excess assets, they may end up paying more taxes than necessary while living, and this in turn means they could be decreasing the size of the estate that will be available to family members down the road.

Specifically in regards to gifts, individuals are able to give funds to their children, grandchildren or other individuals during their lifetime and the cash gift will be tax-free because there is no gift tax in Canada. A common result of this approach is also a reduction in income taxes for the giver because the reduced amount of investible assets effectively creates less taxable income.

From a tax perspective, there may also be advantages to changing the ownership of some investible assets to your child, for example, if they are in a lower tax bracket and have no debt. The investment income  will be taxed at their lower rates. It’s important to note here that the tax savings will vary based on an individual’s province of residence. Additionally, the rules and regulations become increasingly complex once you factor in whether you are giving appreciated or non- appreciated assets and whether the receivers will be minors or adults, so it’s imperative to discuss these options with a qualified tax professional. It is especially important to understand the planning required to avoid the attribution rules and ensure income can be taxed in the minor child’s hands.

When it comes to property, another key  consideration is capital gains tax. To illustrate this point, let’s consider the example of a vacation property. Say an individual owns a lake home where property values are consistently rising. Given the circumstances, gifting the property now to children or to a family trust may be a worthwhile option. Although this transfer would create a disposition at fair market value, meaning the capital gains tax would be triggered immediately (unless the gains can be sheltered using the principal residence exemption), the future growth would not be subject to capital gains taxes and probate fees on your passing but rather deferred to the next generation.

Example – Dominic’s Cottage

Dominic purchased a cottage in 1998 for $140,000. In 2003, he spent $50,000 on an addition. The cottage is currently valued at $420,000. The area where the cottage is located is becoming very popular and property values are anticipated to increase signficantly in the coming years. If Dominic decides to gift the property now to his daughter, Angela, that would create a capital gain of $230,000, 50 percent of which would be taxable at his marginal tax rate (unless it is designated as his principal residence). If Dominic decides to instead bequeath the property in his Will and the cottage ultimately ends up being valued at $600,000 when he passes away, the capital gains would then be $410,000, 50 percent of which would be taxable to his estate. Although gifting it now may result in a pre-payment of some tax, it may offer significant savings in capital gains tax, if the upward trend in property value continues in the same pattern.

Note: To ensure that your own circumstances have been properly evaluated, it is important to consult with a professional tax and legal advisor to complete a cost/benefit analysis and determine the best options for your individual needs.

Financial learning benefits

If personal situation allows, passing down wealth during your lifetime provides a great educational opportunity to help the younger generations in your family develop a better understanding of financial responsibility and management. Even from an early age, children and adolescents can benefit from learning the basic concepts of saving, spending, investing, and sharing. What it comes down to is exposing younger family members to financial decision-making in a safe and age-appropriate way and providing guidance along the way. What this does is help them build a strong sense of financial literacy in relation to everything from the wealth transfer process and methods used for that transfer to how to effectively manage and use the assets and funds. One particular age demographic where financial responsibility takes on a heightened level of importance is among late teens and young adults. For more information on building financial management skills within this age group, please view the article, “Financial management among young adults – realities and strategies,” in the Fall 2016 RBC Wealth Management Services Perspectives magazine.

Transferring wealth upon death

Among some individuals, common reasons for waiting until death to pass down wealth are to ensure there are sufficient funds to maintain the lifestyle they want in retirement or if children or grandchildren aren’t in a position where they need any immediate wealth. Additionally, concerns around having enough for their own retirement are high for many, as the 25th Annual RBC Poll found that 61 percent of respondents identify running out of money if they live to 100 (which is not totally out of the question given the longevity boom) as a top concern. Again here, before choosing the path to transfer assets during your lifetime or through a Will, it’s important to conduct a thorough review of your overall financial picture and goals, and this is again where a comprehensive financial plan may function as a valuable starting point.

Understanding wealth transfer via Wills

While many individuals possess the basic understanding of the purpose behind Wills, some tend to overlook or be unaware of the negative outcomes and challenges that occur if an individual passes away without one. Specifically, dying without a Will means an individual dies “intestate” and this essentially means that provincial laws will determine how the estate will be settled. In other words, you lose the choice of who the beneficiaries will be, who will be the guardian of your children (if applicable), and who will administer the estate. You also lose the power to plan the estate to minimize taxes. And while it is a very important initial step to have a signed Will in place, there are some additional key details and aspects to be aware of in regards to the specifics and maintenance of Wills.

1. Keeping a Will updated. The reality is that life often brings unexpected changes, and as time passes, your situation may change as well. One of the most important times to update your Will or prepare a new one is after a separation, divorce or upon remarriage, and this is for two key reasons. In many provinces and territories (see chart below), marriage cancels any previous Wills, so if someone remarries and then passes away without preparing a new Will, their estate would be treated as if they had died intestate. For those who have separated or divorced, updating a Will is also important, because separation or divorce do not cancel an existing Will in many jurisdictions. Beyond that, it’s likewise important to consider whether an update to your Will is necessary anytime a significant change takes place such  as the birth of a child, death of a family member, and a major health condition.
2. Reviewing your Will regularly. Routinely reviewing your Will is a good way to ensure it continues to meet your wishes and intentions. Outside significant changes in your life, a good rule of thumb is to review your Will every few years.
3. Ensuring your executor is aware of changes. Keeping your executor updated as to any changes in your Will or if you have created a new one helps streamline the process and avoid any confusion or surprises when it comes time for them to fulfill their role as
4. Making sure your wishes are properly documented. It’s imperative to consult with a qualified legal professional to ensure your intentions and wishes are accurately worded and documented in your Will. Your legal professional may also be able to recommend a type of Will to best suit your individual situation, such as a Mutual Will or Mirror Will.

Provinces and territories where a Will is revoked by a new marriage

(unless the Will is made in contemplation of the marriage)

Factoring the rising costs of healthcare

Given the major shift in Canadian demographics taking place over the coming decades, where one-quarter of the population will be over age 65 by 2036,³ there is growing concern among many about the rising cost of healthcare and senior care services. In general, both private and public healthcare costs in Canada have been steadily on the rise, giving individuals reason to think about what those costs are now and anticipating what they may be in the future.

For some, the question marks around their health status as they grow older and what those exact costs may be in the decades to come are enough of a reason to hang onto their assets for the remainder of their lifetime to ensure they can lead their desired retirement lifestyle and still have a safety net should they need significant healthcare or senior care services or products. In fact, a recent national study of Canadians showed that worry over healthcare needs has emerged as the second-most important driver, behind retirement itself.⁴ For more information on planning for the rising costs of healthcare, the Fall 2016 RBC Wealth Management Services Perspectives magazine provides a detailed discussion in the article, “The changing landscape of healthcare in Canada.”

Making communication a priority

For some individuals, there may be an assumption that choosing to pass down wealth upon death means that the Will functions as the communication piece for their ultimate wishes and intentions. While, indeed, the Will contains all of those decisions and wishes, it won’t necessarily offer your family members the reasoning (unless you include it in a separate note or letter, which some individuals choose to do). And though personal preference may dictate how much of the specifics you disclose beforehand, communication in general around decisions made in the Will are so valuable to help family members with the transition process and to help avoid conflict and preserve family harmony. Frequent and ongoing conversations or regular family meetings are another beneficial approach to identify and discuss family values and may give individuals a better sense of what their children’s or grandchildren’s needs are or what they have a vested interest in, such as a vacation property, for example. Through that process, individuals may be able to better navigate decisions and structure their plans in ways that best meets their own and their family’s needs and may equalize their children, grandchildren or other heirs.