There are different tax implications for both courses of action, but the decision depends primarily on your client’s choice

By Dwarka Lakhan | Mid-October 2010

When it comes to the intergenerational transfer of wealth, clients are often conflicted about whether they should gift their assets to family members while still alive or transfer their assets through their wills. The complexity of this decision is such that your expert advice may be relied upon.

In either case, there are tax implications. For some clients, gifting while alive provides psychological satisfaction. These clients will know that the intended recipient has received the gift, and that squabbles after their death have been avoided, says Elaine Wilson, vice president, personal trust services, Fiduciary Trust Co. of Canada in Toronto.

However, she cautions, “Once property is gifted, you can’t take it back.” As a result, she adds, “Individuals need to weigh the value of gifts against future need.”

What clients want to do is avoid depleting their assets through gifts to the point that they do not have enough for their own future needs — especially during retirement.

On the other hand, as Kathy Munro, tax services partner with PricewaterhouseCoopers LLP in Toronto, points out: “[Some] people don’t want to give during their lifetime because they want to maintain control over their assets.”

Concerns often arise in two areas, she says: children who are married can lose what was gifted to them in a divorce (unless they have a written marriage contract); and gifts can be subject to seizure by creditors. Clients with these concerns would normally use their will to direct the orderly distribution of their assets in a way that minimizes taxes to the beneficiaries and the estate. The will identifies the proportion of assets each beneficiary will receive and when they will receive such assets — either immediately or through a trust over a period of time.

GREATER FLEXIBILITY

Dean Paley, senior financial planning specialist and certified general accountant with responsibility for tax and estate planning with Edward Jones in Mississauga, Ont., believes that gifting through a will “provides a lot more flexibility” because the capital gains on any gifts will not be realized while the giftor is alive. In effect, he adds, “You are deferring any taxes on capital gains [until death].”

Arguably, using a will not only allows your clients to determine the beneficiaries, it also gives clients the ability to implement strategies that will minimize or defer taxes once they have passed away.

While still alive, a client can give cash to a child without triggering any significant tax consequences. If an adult recipient invests the cash, any resulting income or capital gains would be taxed in their hands. If the recipient is a minor child, the income earned by the investment — but not any capital gains — would be attributed to the giftor. If the cash is invested in a non-taxable product such as an RRSP, the recipient will benefit from the tax-deferred growth of the cash. On the other hand, the giftor can also benefit by saving taxes if the cash that was gifted had been earning taxable interest income prior to the gift being given.