It’s a statistic that some have likely read or heard before, but it’s one that’s certainly worth repeating: Over the coming years and decades, it’s estimated that approximately $400 billion in wealth will be passed down from one generation to the next across Canada.1 With such a significant amount of money changing hands, a common “grand scale” question that’s being asked is: Are people prepared? Generally speaking, the answer is no. While many have likely given some thought to wealth transfer or know what their intentions and personal preferences are, the reality is that the majority of Canadians have done very little — or, in some cases, nothing — to formally prepare and plan. In fact, according to the RBC WM 2017 Wealth Transfer Report, more than one-third have no wealth transfer plans in place at all. If you combine these findings with the fact that the Canadian population continues to be more strongly represented by seniors, this unfortunately suggests that without greater attention towards individual planning, there may be widespread impacts on a significant number of multi-generational families in the not-so-distant future.
Trends in timing for giving
Generally speaking, the majority of individuals gravitate towards transferring their wealth after death, and the reasons for doing so vary, whether it’s wanting to ensure a certain lifestyle can be maintained, feeling there’s not enough to give away gradually, or even a lack of comfort making wishes known to heirs. Findings in the RBC WM 2017 Wealth Transfer Report confirm this tendency, with 57 percent intending to pass down the entirety of their wealth to the next generation upon death, and only 29 percent intending to gift gradually during their lifetimes. The remaining 14 percent were either unclear on their plans or intended to pass all of their wealth down only if they became ill.
But even when individuals do feel certain about the approach they’re most comfortable with, it’s important to ensure that decisions are arrived at for the right reasons. Personal preferences may, of course, be part of the equation, but there is a range of factors, as well as potential advantages and drawbacks, that need to be considered and prioritized with each approach.
Note: Given that each individual’s circumstances and goals are different, it is crucial to consult with qualified advisors and estate planning professionals to ensure your situation is properly addressed and planning is carried out to best suit your specific needs and goals.
Prioritizing your own financial well-being
When considering when and how you may want to pass down your wealth, your current and future needs should always remain the top priority. This is where it becomes important to take the time to assess your present financial situation and really give thought to your long-term financial objectives, the type of lifestyle you want to maintain into and throughout retirement, and any potential events or changes to your circumstances that may add to your financial needs down the road. Some important questions to ask and to examine include:
- When do I want to retire?
- How and where do I want to spend my retirement?
- What type of lifestyle do I want to maintain?
- What health and healthcare considerations do I need to potentially account for?
- What family dynamics or circumstances may impact my plans?
After answering these questions, the next step is determining what the associated costs may be. Given the multitude of considerations, many of which may be complex, shifting or overlapping, a useful option for some may be comprehensive wealth planning (for example, financial and estate planning), as it provides the opportunity to take stock of all of your income, expenses and assets, and then align them with your financial objectives and needs throughout the course of life.
For more information on senior health and the rising costs of healthcare, please view the accompanying article in this issue of Perspectives, “Is age but a number?” and the RBC WM Perspectives Fall 2016 article, “The changing landscape of healthcare in Canada.”
Giving of wealth – the impact of emotions
Whether you’re keen to pass on wealth during your lifetime or prefer to do so via your Will, or a mixture of both, feelings can often quickly take the driver’s seat in the decision-making process, and in some cases it can interfere with your original intentions. For many, a common time when emotions come into play is when new milestones among family members occur. For example, maybe your grandchild is pursuing further education or is purchasing their first home. Or perhaps your child is getting married or is expecting a baby. While emotions can be a very strong motivator, it’s important to still remain mindful of the fact that while you may have the excess funds in the here and now to give, making a significant gift now may not fit with your overall wealth plan and may impact your own personal needs over the short or long term.
Potential benefits of giving during one’s lifetime
For those who do determine, through detailed and comprehensive wealth planning, that they have assets beyond their required and potential needs during their lifetime, there may be some benefits to passing down wealth while living. This can provide an opportunity to see the benefits of that gift during your lifetime and help a family member or loved one when they need it, which can be very rewarding and satisfying. Together with this, there may also be some distinct tax and estate advantages that giving while living may offer.
Some individuals may be in a situation where their assets generate more income than what they require to support their lifestyle. If this is the case, there may be an opportunity to gift assets during one’s lifetime. From a tax perspective, this approach may help reduce future income taxes for the giftor, because they will have less income-producing assets in their name. It may also shift potential future appreciation of these assets, and the associated taxes, to beneficiaries. In addition, if the beneficiary is in a lower tax bracket than the giftor, this strategy may prove beneficial from an overall tax standpoint.
When you gift income-producing assets such as stocks or bonds, you may create an unexpected tax liability. Generally, gifting an asset to an individual (other than a spouse) is treated as a sale at fair market value, triggering any unrecognized capital gain on the asset. Also, the income attribution rules will be applied if the gift is to your spouse or a minor child. Under these rules, the income earned on gifts to either of these persons will still be taxable in your hands (except for capital gains received by a minor child).
You should also be wary of transferring an asset for nominal value (e.g. $1) or some other amount less than fair market value. In some cases, you may be taxed on the full capital gain associated with the asset, and the person receiving the asset will, for tax purposes, have received it at the price they paid you for it, resulting in double taxation.
Reducing the size of your estate
Whenever an individual passes away, their executor (called an estate trustee in Ontario and a liquidator in Quebec) may be required to obtain a grant of probate in order to be able to fully administer the estate. Probate is an administrative procedure to validate the Will and confirm the authority of the executor/liquidator to act on behalf of the estate. Probate is often required by a financial institution to release a deceased’s assets to the named executor of the estate. Most provinces and territories charge a tax when your Will is probated, and within each province and territory, there are varying probate fee rates, which are generally based on the value of the assets passing through your estate. Depending on the province or territory where you live, taking steps to reduce the size of your estate during your lifetime may prove beneficial in helping to ultimately reduce probate fees upon your death. For example, if you’re a resident of Ontario where probate fees are high, as high as 1.5 percent depending on estate size, giving away assets during your lifetime may effectively decrease the value of the overall estate and thus reduce the amount of probate fees that would be due upon death. On the other hand, if you’re a resident of Alberta or Quebec, for example, this approach may not be a strong one to consider, as probate fees are nominal.
For many, the information and decisions contained within their Will are very personal in nature. What some may not be aware of is the fact that when an individual passes away, if their Will needs to be probated, it becomes a public document and may become available for public access.
Every individual may have a different comfort level with their estate details becoming public, and some may not want others to know what their estate comprises, how much is being passed to family members or others, and the specific breakdown of what is being directed to whom, for example. Depending on your personal circumstances, and the value or level of importance you place on keeping this type of information private, giving while living may be an effective strategy to consider, as it gives you privacy over the wealth transfer decisions that you make.
Giving through a Will
Though the majority of Canadians do intend to pass down their wealth upon their passing, according to the RBC WM 2017 Wealth Transfer Report, only just over half have a valid Will in place to accomplish this. This seems to indicate there may be a lack of understanding among many about the negative outcome and challenges that can occur if you pass away without a valid Will, and how it can completely derail your wealth transfer intentions. When someone dies without a valid Will in place, they are said to have died “intestate,” which generally means that provincial or territorial laws will determine how the estate will be settled, and you lose the choice of who your beneficiaries will be and who will administer the estate. What’s more, you may lose the benefits that come with advanced estate planning, such as minimizing income taxes payable on death.
For those who are drafting their Wills or who do already have a signed Will in place, the following are some steps to take to ensure the validity of the Will and that it’s properly maintained over time:
- Keeping your Will updated. When change takes place in your life, such as the birth of a child or grandchild, a change in marital status, or the death of a family member, for example, you may wish to review your Will and make any changes if necessary. Specifically when it comes to changes in your marital status, it’s also crucial to understand the impact this may have on the validity of your Will or any gifts or appointments made under your Will.
- Regularly reviewing your Will. Beyond significant life changes, a good rule of thumb is to review your Will every three to five years, to ensure it continues to meet your wishes and intentions.
- Keeping your executor updated. Because of the key role your executor plays in the administration of your estate, it is recommended to make sure they are aware of their appointment, as well as changes to your Will or if you have created a new one. The executor should also be informed of the location of your Will.
- Making sure your wishes are properly documented. Wording within Wills needs to be very specific and accurate. To ensure your wishes and intentions are correctly worded and documented in your Will, it’s imperative to consult with a qualified legal professional.
Passing down knowledge
Regardless of the method or timing chosen, wealth transfer is a topic that’s largely under-discussed in most families. But when it comes to helping to ensure a smooth transition of your wealth to the next generation, communication is a critical tool. It provides you the opportunity to outline your intentions (for example, wealth preservation for future generations) and share the reasoning behind your decisions. Additionally, it can help future inheritors understand the process for receiving their inheritance and creates broader opportunities for financial learnings in younger generations.
For those who may be hesitant about having these conversations, it’s important to recognize that the benefits of opening up dialogue far outweigh the risks of avoiding the topic. When intentions are clearly communicated and understood, wealth transfer is much more likely to be successful and it helps to ensure future inheritors won’t be left in the dark or with unanswered questions. From a family standpoint, it also helps to better ensure your values and your legacy will be preserved in the way you intended and that family relationships and harmony will be upheld.
Building sound financial management skills
Beyond informal financial learning opportunities, such as those provided by family members, for example, there are distinct benefits of formal financial education. Estate and wealth transfer planning are key principles of financial literacy, and areas that individuals of all ages should have a firm grasp of. To help younger individuals, as well as those at every life stage, RBC WM has developed the RBC WM Financial Literacy program for those who are 16 years of age or older. Within the program, there is a learning module that specifically covers Wills and estates, providing useful and practical information to help educate individuals about this area of planning. For more information, please view the accompanying article in this issue of Perspectives, “The RBC WM Financial Literacy program.”
For more information on incorporating charitable and philanthropic giving into your wealth transfer plans, please view the accompanying article in this issue of Perspectives, “Creating a lasting impact.”