With a variety of ways to transfer wealth, varying from the complex and restrictive to the simple and quick, what are some of the options individuals may want to consider?
When it comes to family, one thing is for certain: every family is different. Whether in structure, circumstances, dynamics or goals, each family has unique defining features that drive both how they function and the decisions they make. In estate planning and wealth transfer, these unique and individual aspects often play a large role in how, when and why assets are transferred in a specific way and certain plans are put into place.
Looking specifically at family statistics within Canada clearly illustrates the diversity that exists, even at the structural level. According to recent Census data, 67 percent of couple families are married, 16.7 percent are common-law, and 16.3 percent are lone-parent.5 Digging deeper into these statistics, of all couple families with children, 84.7 percent are intact and 12.6 percent are step- or blended families.6 Again taking this one step further, these blended families may include children from previous relationships, the current relationship or a mixture of both. And, with divorce rates hovering in and around 40 percent mark in Canada,7 stepfamilies and blended families are on the rise, further emphasizing the growing diversity within family structures across our nation. If you layer on top of that the other circumstantial and dynamic challenges that families often face, it’s clear why the topic of wealth transfer may quickly become complicated for many.
With these elements in mind, the question becomes how to effectively plan in a way that best aligns unique family dynamics and goals when also dealing with a wide range of, and possibly conflicting, needs. What it comes down to is recognizing that much like family aspects and defining features range from very complex to fairly simple or traditional, so too do the options and approaches available.
Specifically in regards to transferring wealth, there are a wide variety of options to consider. Some of the more complex ones include inter vivos and testamentary trusts; on the simpler side are outright gifts and inheritances, joint tenancy with right of survivorship and beneficiary designations. The choice in preference among some is tied to a strong sense of hope or intent to positively impact and assist the next generation, but unfortunately, the right plans often aren’t in place to ensure that happens smoothly and in a way that supports family harmony. When this type of disconnect exists between hopes and execution, it leaves the door wide open for conflicts to arise that may negatively impact family dynamics and relationships. As such, it’s crucial to connect the dots, so to speak, in identifying specific goals and circumstances and then working with qualified estate planning professionals to find the best methods to achieve individual and family objectives.
In general, trusts are considered an effective method for distributing assets in a way that helps solidify a particular outcome, while at the same time creating the ability to tailor to individual preferences. The creation of a trust occurs through an individual transferring assets (which may include investments, principal residences, vacation properties, shares of private companies, and even family valuables) to a trustee, who then becomes responsible for administering those assets on behalf of the beneficiaries. What the trust does is sets out a relationship between the trustee and the beneficiaries where the trustee has legal title to the particular asset and the beneficiaries gain the use of it according to trust agreement guidelines. In general, there are two main types of trusts: inter vivos and testamentary.
An inter vivos trust (also known as a living trust) is one that is established during an individual’s lifetime. This type of living trust can be structured such that it provides the person gifting the assets with significant control and flexibility over the timing and amount of assets distributed to the trust’s named beneficiaries (the heirs). It’s important to note that the assets aren’t controlled directly, but rather named trustees must administer the trust assets in accordance with the trust agreement. Although normally income retained in a properly structured living trust is taxed at the top marginal rate, if the trust agreement allows it, it may be possible to make the income paid or payable to the named beneficiaries and tax the income in their hands at graduated tax rates.
When assets are transferred into an inter vivos trust, this creates a disposition for tax purposes, which may result in a tax liability for you. There are also annual tax considerations that need to be accounted for. For more information on specific tax planning for trusts, the Fall 2016 edition of RBC Wealth Management Services Perspectives magazine includes key information in the article “Year-end planning checklist for trusts.”
This type of trust is one that comes into effect after death, and the creation of the trust is generally documented within the text of the Will. Testamentary trusts allow individuals to pass specific assets to beneficiaries without allowing them to gain control of the assets. The assets held are invested and managed by the trustee of the trust, with income and capital distributed to the beneficiaries in accordance with wishes as stated in the Will. Testamentary trusts present a potential option to provide for all desired beneficiaries who are part of the family, as it’s possible to establish more than one trust for different family members.
With the rise of stepfamilies and blended families in Canada, there’s a greater need for assistance in navigating the often complicated aspects that these family types face in estate planning and passing down wealth. Those who are part of a blended family may be challenged by potentially competing interests while at the same time trying to ensure family members are treated equitably.
For those in a blended family situation, trusts may offer the ability to tailor according to individual needs and preferences. The following chart outlines some of the key types.
Note: For more planning information specific to blended families, please view the Fall 2016 edition of RBC Wealth Management Services Perspectives magazine article, “Making wealth transfer work for blended families.”
In considering all of the options available, the most straightforward approach to passing down wealth is through outright gifts during an individual’s lifetime. For some, the reasoning behind this approach is largely to help out children or grandchildren with activities such as purchasing a home or pursuing education. Among those who prefer this option, some of the value is often generated in seeing the benefits of those gifts during their lifetime.
When considering giving a lifetime gift, an important drawback to recognize is that in doing so, you relinquish all control over the asset, which for some, may not be an acceptable outcome. Depending on individual circumstances, concerns often centre around how those assets will be used and whether it will negatively impact the receiver’s motivation to achieve success on their own. These same concerns often also hold true for inheritances.
When leaving assets to your children or grandchildren, it’s important to first examine a few key considerations.
Another simple form of transferring assets is through the registration of assets in joint ownership, specifically Joint Tenancy With Right of Survivorship (JTWROS). This form of ownership allows two or more people to own an asset together, such as a vacation property, for example.
All individuals listed as joint tenants share ownership and control of the asset, and upon the death of one of the individuals, the ownership automatically passes to the surviving individual(s) who are part of the agreement. By passing directly to the surviving individual(s), the asset is not part of the estate and as such isn’t subject to provincial probate fees.
Note: Quebec residents cannot use a Joint Tenancy With Right Of Survivorship (JTWROS) agreement, since an automatic right of survivorship does not exist under Quebec law.
An additional method for wealth transfer that falls under the “simple” umbrella is through the use of beneficiary designations on registered plans, Tax-Free Savings Accounts (not available to residents of Quebec) and life insurance policies. The main benefit here is that assets pass directly to the beneficiaries without having to go through the estate. What’s important to keep in mind, however, is ensuring these designations remain updated and is consistent with any designation made in your Will.
Regardless of approach or timing of the transfer, central to the success of passing down wealth is open and ongoing communication with family members. For many, estate planning and wealth transfer discussions often stir up feelings of discomfort, as there may be strong emotions involved. But despite the potential discomfort in having those conversations, open dialogue among all those who are or will be included in the estate plans is so crucial, for two key reasons. First, it provides the valuable opportunity to educate children and grandchildren about financial responsibility and money management, and also helps them better understand the types of structures and planning decisions that have been put into place. Second, it opens up discussions around why certain strategies have been used and gives the receiving generation a clearer idea as to why decisions were made in a certain way, effectively decreasing the likelihood for conflict and potential emotional upset and disruption to family harmony.
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