(please read the beginning of the article in our previous posts)
Author of the article: Renée Sylvestre-Williams • Canadian Family Offices
Insurance
This is probably one of the last remaining ways to pass money intergenerationally without paying tax on it, says Scott Dickenson, principal of client service at Northwood Family Office in Toronto. He says that generally, the calculation for purchasing a policy is to determine approximately how much money the recipient is going to need for the rest of his or her life, and then add some buffer to that, because you never know what’s going to happen, such as a serious health crisis.
“[From there], it’s about defining the rest of your money as, ‘This is not for me, this is for someone else,’” Dickenson explains. That someone else might be a charity, or it might be future generations.
He says this is an option if you have a pool of cash, but the issue is that most people don’t – they have investments such as stocks, private assets and real estate. “Obviously, if those assets have gone up in value since you purchased them, there’s a tax bill associated with the transfer.”
Another option is purchasing a life annuity for a child. This product guarantees a regular income for the child’s lifetime. Lester says they can work if the amount of money is small, like $500,000 or less, but they don’t offer a lot of flexibility. If the sums of money are bigger, trusts can be a better option.
Experiences
Sometimes parents and grandparents want some family time, and the best way to do that is to apply their wealth toward experiences. Astaneh says families who have already written cheques toward first homes might shift to spending money on family vacations.
“So everything about it is a gift,” he says. “The difference is that you’re not helping them buy an asset, you’re actually helping them cover an expense.”
A few final notes
When it comes to transferring wealth, advisors say it’s important to keep several things in mind.
First, says Lester, don’t let tax efficiencies dictate the best ways to pass on wealth. While taxes are important, you should also consider the amount of wealth that is being transferred, as certain products may not make sense to include in your estate planning, she says.
The other is to start early. Astaneh says people in their 50s have begun the process because their children are or are close to becoming adults, so the beneficiary bridging process can start.
“[Estate planning] is not something that you can just flip a switch and get it done because you’re typically dealing with assets that require management, and there’s some skill involved there,” he says. It takes time to understand what’s involved in the estate and how to manage it.
*The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this text accepts any contractual, tortious, or any other form of liability for its contents.
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