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owing on capital gains. Upon death, the mother could have distributed proceeds from the sale of the cottage as she saw t, thereby preventing family acrimony and bitterness.
He suggests the agenda for family estate plan- ning meetings should include topics such as:
› Family values – the principles and ideas that have informed parents’ decisions to leave what to whom;
› Unequal bequests – whether parents intend to leave more to one child or another, and why;
› The family business – who’s going to be active in the business if there is one, and who’s not; who will have an ownership stake, and who will not;
› Philanthropy – which causes and charities the parents will support (if any) with their estate; and
› Personal effects – mementos and keepsakes that could have immense meaning for one child or another, or could cause acrimony in the future.
“Mom and Dad should be able to tell children what they’re doing and why they’re doing it, and that way there’s clari cation,” Wusyk says. “It just helps the kids understand the mindset or the rationale.”
Plenty of reasons to give . . .
Regardless, early giving can be an attractive estate planning strategy.
Since assets given away prior to death aren’t technically part of an estate, they aren’t subject to probate.
Another reason to give early is to save tax—not now, but years down the road. While there are technically no limits to the amount a Canadian citizen can give in a year, when an owner gives, she’s deemed to have disposed of the assets at fair market value. That means any capital gains taxes must be paid.
Wusyk says with a family cottage or other assets that will eventually be passed to the next genera- tion, an early tax payment could be a good thing.
“If you’re relatively young parents, and the prop- erty is going to be in the family for twenty or thirty years more, to give it at a very low value may be a good idea,” Wusyk says. “If you don’t, then when
the children do get it they’re going to pay a larger amount of tax.”
Wusyk admits it’s not an easy decision. “You have to decide: do you want to trigger a little tax now, or a very large amount later?” he asks. “Or, do you want to keep it in your hands now and then gift it at death, and use an insurance policy to pay off the tax?”
He adds many families opt for the latter, pur- chasing a joint last-to-die policy payable to the estate. Even late in life, Wusyk says such policies are extremely cost-effective, and can go a long way toward helping heirs retain assets they’d otherwise have to sell to cover taxes.
If a client is a business owner, the same idea can be applied to privately held corporation shares. Should parents hang on to ownership shares and defer tax as long as possible? Or should they freeze those ownership shares at their current value, then make a gift of newly issued shares, thereby passing future growth to the next generation? Both can be viable strategies. If, for example, the family’s goal is to pass on growing assets within the family 10
NUMBER CRUNCHING
G G i i v v i i n n g g a a s s s s e e t t s s n n o o w w , , r r a a t t h h e e r r t t h h a a n n l l a a t t e e r r, , c c a a n n m m a a k k e e a a l l o o t t o o f f n n a a n n c ci i a a l l s s e e n n s s e e , , p p a a r r t t i i c c u ul l a a r r l l y y i i f f t t h h e e a a s s s s e e t t s s in question are expected to appreciate, and will be held by heirs for a long time.
This example shows the tax bill on a recreation property in Ontario purchased
f f o o r r $ $ 5 5 0 0 , , 0 0 0 0 0 0 , , g g i i v v e e n n t t o o c c h h i il l d d r r e e n n n n o o w w, ,
and in 20 years via a will. To
keep the math simple, we’ll
assume tax rates remain the
same, and there are no other
improvements to the property. We’ll also assume the owner and estate will be subject to the highest tax bracket.
PAY NOW
PAY LATER
VALUE:
$200,000
$600,000
CAPITAL GAIN:
$150,000
$550,000
TAXABLE:
$75,000
$275,000
TAX PAYABLE:
$34,800
(Paid by children)
$127,600 (Paid by estate)
www.advisor.ca
01 2015 AE 9
$34,800 or $127,600?
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