They say you can’t take it with you, and that’s why so many parents want to give their kids a leg up while they are alive. If you have money kicking around, and you want to help your children with school, a home or a business, Pierre Letourneau, High Net Worth Planner at TD Wealth, offers some tips on how to gift that money.
So first off, yay. Parents, you know, if you're on the receiving end of this, this is fantastic news. But what are the common ways people generally do it? Right or wrong, what do people often do?
So a lot of things. Probably the most common way is just to gift it outright.
That's often the most common--
Write a check.
Write a check, deposit it in their bank account, give them a check to use the funds as they see fit.
So that's the most common way. For minor children, we've seen a lot of clients use interest accounts.
That's pretty common. There are some limitations to interest accounts.
We'll talk about those.
What's the downside to just cutting a check?
The downside really is you're losing control of those assets, or you're losing control of those funds. Technically, your children can do whatever they want with those funds.
And so you're not able to have any control over that. And those funds are then exposed to any of their creditors. And oftentimes, that could be an ex spouse. So the funds could become family property, and then be subject to a family law claim if there's a breakdown in marriage.
Got it. So you want to be a little more smarter about this if you can.
Exactly. Well, especially with children that are married, or in a married relationship.
So generous is great, generous and smart is awesome. So let's try and go through the smart ways here, because you've got-- and again, these really apply what I say to larger sums of money, if you want to gift your children. You've got four ways that people could give money. So let's bring up the board here, if we can. I think we've got our options.
First, you could just give the money outright, which you highlighted. You could, as you mentioned, an in-trust account for children under 18. A family trust, or a loan. So let's go through-- again, the first one you said not such a great idea because you lose control. Tax implications if you're just cutting a check?
There could be-- if you're just cutting a check, probably no tax implications, unless you're gifting to a minor, and that minor would invest the funds, then that income earned with that-- with those investments would attribute back to the parent.
But if you're gifting an asset that has a large accrued capital gain, there's a deemed disposition on the gift, which then triggers the capital gain. And you'd have to pay tax on that.
- So not so great any which way from a tax perspective--
From a tax perspective, yeah.
- So an in-trust account. This is if you want to gift money to somebody who's under 18?
Yeah, under-- or under 18 in Ontario, but age of majority in other provinces. So that might be 19.
And it's because minor children can't open an account. So the in-trust account is a way to have funds in their names, but technically in trust with the parent until they reach the age of majority.
So how does that work, though? So like just practically speaking, I guess, if the child wants access to the money, I'm assuming that the person who put this in the trust account, they're the ones who actually get to sign off and say yeah, you can have it?
Exactly. They will until the child reaches the age of majority. And at that point, legally they're entitled to those funds. So they could use the funds as they wish once they hit the age of majority.
Interesting. OK. Third one is a trust account. So this is something that--
A family trust.
Family trust. So again, how does that one work?
So a family trust, it's a more formal arrangement. So assets are transferred to a trust, which is a separate entity.
And so really, assets are held by trustees for the benefit of the beneficiaries, which would be the children in this situation. And a lot of times, the parents would be the trustees. So that means that they'd have control over the assets, because as trustees they make the decisions in terms of how the assets will be invested, when the assets would be distributed to the children. And so the advantage is that they can determine when the assets will be distributed to the children. You may be able to split income with the children, depending on how it's set up.
Now, I understand, too, though, there's something that happens every 21 years.
This is something-- so if you had a trust set up for a minor, it's not something that just goes on in perpetuity.
Well, it could, but after 21 years the trust is deemed to have disposed of all of its assets.
So what does that mean?
So it means that it's similar to the trust selling its assets for fair market value. So if you have--
So tax time.
Tax time. If you have assets that have appreciated in value, then you, again, trigger a capital gain, and the trust needs to pay tax on that.
And then it goes back, it reverts back to the-- or it always stayed in the same legal structure anyway.
Yes, you could continue on with the trust. But practically, most times, if assets are going to appreciate inside the trust, the trust is wound up before that 21-year deadline, and the assets are distributed to the beneficiaries.
And the fourth option was a loan.
A loan, yeah.
So how does-- so how does a loan equal a gift?
So it's helpful in certain ways when you want to either retain some control over the assets or you want to protect the assets against certain creditors. So the most common example where we see a loan is if a client wants-- or a parent wants to help out a child with purchasing a property.
Real estate property that could become matrimonial property in the future.
By loaning the assets and having a loan document in place, they could then protect that capital if there is a breakdown in marriage, because the loan would need to be paid back if there is a breakdown in marriage and you need to split the assets.
Now, if you-- what are some things for the people who are going to be either, you know, loaning or-- you know, essentially gifting the money in one form or another. What are the things that they need to think about before they actually do these things?
So first off, make sure that you can afford to make this loan or this gift to your children.
That sounds like an obvious one.
That is an obvious one.
But why would it not come out that way? I mean, I'm assuming, like, if you get sick and you need the mon-- what would be--
Exactly. There could be certain things that happen later on that you didn't really think about that you would need access those funds. And so technically, once you've gifted those funds, they're no longer yours, right?
Yeah, yeah, yeah.
So you might-- or they're spent.
So you might not have access to them. Obviously, think about the tax consequences that come with that. Think about the amount of control you want over the assets. If you want to retain some control, then gifting outright is not the right choice.
Think about potential family law claims that might come up in the future, and make sure that you set it up so that you protect your children against-- or at least protect the assets against a potential family law claim.
I've only got about 15 seconds here, but I'm curious, I mean, you do this, and actually after people talk to you, I'm sure they have great plans, but do you hear of these things going awry quite a bit?
I have seen some situations where it did end up pretty badly, unfortunately.
Yeah. Yeah. And is that just because people just didn't--
They didn't really think about the consequences of what they were doing. And unfortunately, it didn't end up well.
Yeah. And so start thinking about it now if you want to do something. Pierre, always great to have you here. Thanks so much.
Pierre Letourneau. He's a high net worth planner with TD Wealth and joined us here in studio. Thank you for joining us tonight.