Dead or alive: When is the right time to transfer wealth?

The challenge for many high-net-worth individuals isn’t making their money last, but knowing when to pass it on to their children.

Approximately $30-trillion in assets will be shifting from one generation to the next across North America in the next few decades, according to consulting firm Accenture.

The dilemma for those transferring money to children, grandchildren or charities, is whether to do it during their lifetimes or leave it in the will.

While not all Canadians are in a position to gift money to their children, “with higher-net-worth people, this can be a huge big issue,” says Susan Latremoille, director of wealth management at the Latremoille Begg Group with Richardson GMP in Toronto.

Reasons to transfer while alive

Tax savings is one of the main reasons parents might consider giving away some of their wealth while alive, says Melinda Olliver, senior tax and estate planner at National Bank Private Banking 1859 in Calgary.

“When a person dies, they are deemed to have disposed of all of their assets, so if there are inherent capital gains, there can be quite a large tax bill on their passing,” Ms. Olliver says.

Probate fees, which she describes as “quite high” in provinces such as British Columbia and Ontario, must also be paid on assets that pass through the estate.

There is no tax on gifts in Canada, which means the recipients don’t have to pay a portion to the Canada Revenue Agency. However, Ms. Olliver says those doing the giving can still be taxed on capital gains they may receive from the sale of the assets, such as equities, before the proceeds are passed on as gifts.

How much to give early

One significant challenge for high-net-worth individuals is figuring out how much to give before death, or perhaps more important, determining the right amount.

Ms. Latremoille says many of her clients want to help their children, but worry about giving too much too soon and creating a “sense of entitlement” that may be a disincentive for them to work hard. She cites the well-known Warren Buffett quote that he wanted to give his children, “enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Ms. Latremoille describes it as “a great line to give by.”

Although a good starting point, determining how much to give – for what reason and to whom – varies significantly by family, says clinical psychologist Moira Somers, who works with wealthy families at Winnipeg practice Money, Mind and Meaning.

She recommends parents first talk among themselves – and with a financial adviser – to come up with a basic framework of how and when to transfer their wealth. Equally important, she says, is communicating with children to find out what they need, or at the very least, to inform them of the reasoning behind a giving plan.

“One of the biggest problems with dealing with estate planning – whether giving is done dead or alive – is that it has not been talked about, so the children don’t know why you’ve made the decisions you have made,” Ms. Somers says.

Fair versus equal

A well-devised giving plan does not always mean that each family member receives equal sums. What’s important is fairness – along with a clear explanation of why a gift is “fair,” says Brad Pashby, a financial adviser at Sun Life and certified financial planner with Narrative Financial Services in Vancouver.

Mr. Pashby says a lack of clarity could lead to legal problems. “For instance, in B.C., there’s Variation Act, which means that if someone leaves money to kids in the will, and some don’t feel it was fair, they can sue the estate,” he says.

One strategy he recommends, to ensure a more equitable division of assets among beneficiaries, is for the parents to provide a child in need of financial help a low-interest, or no-interest loan. The loan would be provided while the parents are still alive.

“Then, that loan can be forgiven in the will, so effectively it’s the same idea as giving, but … makes things a little more fair in the division of the estate,” Mr. Pashby says.

Types of assets to transfer

Many wealthy individuals also own businesses and want to pass ownership on to children by gifting shares of the corporation.

A common strategy in this scenario is to do an estate freeze, Ms. Olliver says. This move involves the parents converting their common shares to preferred shares. The value of the shares is frozen, but the parents are still paid profits from the company via dividends. At the same time, children become shareholders, buying common stock at nominal value – such as $1 – and participating in future growth.

Some parents prefer to give their children cash to help them buy a home, fund their grandchildren’s education, or to ensure a child with a disability has enough to pay for a lifetime of needs, Ms. Latremoille says.

When a child’s ability to manage money is a concern, she recommends setting up a trust. The trust structure gives parents control of the assets, allowing them to determine how much and when beneficiaries receive money. As well, the assets inside the trust are protected from creditors and legal proceedings, including divorce.

Consider incremental giving

Many parents want to instill in their children a sense of stewardship of family. In this case, Ms. Somers urges caution when attaching conditions to their generosity. “Is it a gift or isn’t it?” Ms. Somers says it should be made clear.

Others may want to consider giving their children a small sum at first, to see how they handle the money, Ms. Somers says.

“It can start by giving $10,000 to each adult child, saying, ‘This isn’t a test. I just wanted to see what you might do with it and how it might benefit your life, and I’d love to hear about it from you.’ ”