Many of us are focussed not only on living comfortably in retirement, but also on the desire to leave behind a substantial financial legacy for our family’s long-term benefit.
Without impairing our lifestyle, or running a risk of prematurely exhausting our capital, some of us may have the financial capability to assist family members while we are still around to enjoy seeing the benefits that our early generosity can play in the lives of our children and grandchildren.
It is important to dispel a myth related to “giving”. There are those who believe that a major gift to a family member may have tax consequences.
This is not correct.
A gift to an adult, whether family member or not, attracts zero tax for either the donor or the recipient. Certainly, if one needs to sell assets to be able to make the gift, and the assets have an embedded capital gain, a capital gains tax will be assessed on the sale, but not on the gift which follows.
We must also exercise care in our gifting, to ensure both that it is appropriate and that the recipient is likely to use it wisely. A few possibilities to consider:
• Helping an adult child or grandchild with the initial down-payment on a first house can greatly accelerate their dream of home ownership.
• Assisting older children in paying off their mortgage a few years early can assist them in accelerating savings for retirement, whether in RRSPs or TFSAs.
• Assisting with the cost of post-secondary education by setting up, or contributing to, an existing Registered Education Savings Plan (RESP) for grandchildren can take financial pressure off their parents.
At the same time, the account will benefit from the Federal Government’s 20 per cent addition of (up to $500 annually) to the amount contributed.
For a family with more than one child, it is wise to set up a “Family RESP” rather than a separate account for each child.
This ensures that all future funds in the account become available to any of the children covered by the account who actually pursue post-secondary education.
The sweet spot for contributions to an RESP is $2,500 annually per child, that being the number at which the government’s 20 per cent is maximized at its $500 annual limit. The lifetime contribution limit per child is $50,000.
If none of the above options are attractive, or you wish to do more for the minors in your family, consider setting up an “Informal Trust” for that child.
This can be most practical if the child’s RESP eligibility has been fully utilized. It is as straightforward as opening an investment account in your name, and including the words “In Trust for ___.”
In most cases, there are tax advantages to you of having an Informal Trust, as opposed to saving/investing the funds for the child’s benefit – but exclusively in your name.
While all annual income generated by the “In Trust” investments will be attributable to you for tax purposes, any capital gains will accrue to the child — not to you. Since the child is unlikely to be in a taxable income bracket, capital gains taxes may be totally avoided.
With an Informal Trust, it is important to note, that once the child reaches age 19, he/she can access the account, and use the funds in any manner he/she sees fit.
Nothing in these suggestions is meant to make one feel obliged to financially assist family members.
Your primary obligation in retirement is to be certain of your own financial security, comfort, and well-being. However, if fortunate enough to achieve these objectives, with funds to spare, the outlined options are worth consideration.
There is far greater joy in seeing the benefits of an early gift to family members, than having the funds eventually distributed by an executor, once we are gone.
A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including The SMART CANADIAN WEALTH-BUILDER.