Show Transcript
One joy of being a grandparent is spoiling your grandkids. And as the kids grow, so can the size of the financial gifts. Georgia Swan, Tax and Estate Planner, TD Wealth, joins Kim Parlee to discuss some ways to help ensure your gifts don’t come with unintended consequences.
Print Transcript
[AUDIO LOGO]
* One of the best parts of being a grandparent, I'm told, is being able to spoil your grandchildren. But as kids get older, the gifts can get larger and-- let's face it-- sometimes a bit more complicated, whether it's supporting their education, sharing a large cash gift, or maybe helping with a down payment for a home. So how can you make sure your gifts don't come with unintended consequences for them or for you?
* Georgia Swan is tax and estate planner at TD Wealth. She joins me now with some things to consider when gifting to your grandchildren. It's interesting. You and I were chatting before. The big one is also just what it could mean for you. And that's something maybe grandparents, selfless, want to help, maybe not think all that through.
* So we'll talk about everything. But maybe let's start with the first decision you have is when to do it. Do you want to do it when you are still living and can see the benefit? Or do you want to wait?
* So that's actually it. When you do it while you're alive, you get to see the benefit of it, so an education free from debt or your grandchildren enjoying their first house. So that's always a wonderful thing.
* The problem with that is you have to make sure you can really spare the money. Because if you can't honestly say, I'm never going to need this amount, so whether I have medical issues or long-term care issues, I'm never going to need this money, then that's great. Do it while you're alive and enjoy what comes of it.
* But if you can't honestly say that I'm never going to need it back-- because you probably won't get it-- then maybe it's better to wait and do it through your will because then it's going to be a part of whatever's left over. So it's not going to affect your lifestyle while you're alive.
* Yeah, good point. Now, in terms of ways you can do it, I mean, one way you can do is you can give cash. You can give money. What do you need to think about?
* So when you're thinking about giving money, let's say, for example you want to give $200,000. The problem is you have to really think about what that is actually costing you. So $200,000 in cash is usually after-tax money. So if you're in the highest marginal tax rate, for example, that might have cost you $300,000 in order to make $200,000.
* You also have to think then, again, in the vein of can you spare it, that that's money now that's not going to be working for you. So you've lost the future investment opportunity for that money. So that's part of the consideration when I say, can you really spare it? What is it actually costing you to gift that amount?
* Yeah, and there's a lot to go through here. So I'm going to say a bit of a rapid fire on this one. So if you say, OK, maybe not cash, maybe it's a security, stock, maybe it's property, what does that mean for you?
* So, again, tax consequences because you can't-- let's say you want to gift the cottage to the grandkids. In that case, it's considered-- you can gift it under real estate law. You can transfer the ownership. But the problem is that it's going to be a disposition of that property to you. So if there's accrued capital gains, you're going to have to pay tax on it. If you want to gift money, for example, from an investment account, you're going to have to liquidate that account.
* There can also be issues-- I had a client once that wanted to gift a rental property. And they kind of wanted to do it to say, well, the rental property is worth $1 million. I'm going to have them pay me part of that. They're only going to have to pay me $500,000.
* That can create another tax problem, especially if it's an income-producing asset. Because there's something called attribution rules that when it goes at less than fair market value that the income ultimately that the grandkids would get can attribute back to you. So there's so many intricacies based on how you want to structure this so-called gift that you really have to investigate.
* OK, yeah, don't do it with the tax bill. Education, most of-- a lot of grandparents want to help with their grandchildren's education through an RESP.
* So absolutely. That's almost an indirect gift to your kids as well. Because if they're not saving for the RESP, they have more disposable income to do other things. So it's great. You get the bond, and you get the grant. But you have to be careful. If it's an RESP that you as a grandparent created-- so you're the subscriber-- you have to have special wording in your will that appoints a successor subscriber.
* Because if you don't, and the RESP hasn't been used, it's going to be collapsed. And the contribution amount-- so all the grants and the bonds-- go back to the government. The contribution amount will end up going through your will. So it's very important if you are the subscriber of the RESP to have that wording in your will to appoint a successor subscriber. That's a conversation you really should be having with the parents of the kids.
* When you set it up. What about a down payment for a home? I like all these lists, by the way. These are fabulous. But if you decide that, which is a wonderful gift, what do you have to think about?
* So that's the biggest one. That's the one I see most often. So absolutely. The first-home savings account, if your grandchild has opened one, you can gift them some money to top that up. You've got other tax-efficient ways of buying a new home. But certainly, you can also-- if they've gone part way to getting that down payment, you can give them a little bit more.
* Now, the thing that happens in that case is sometimes people want to structure that really as a loan. They say-- especially you see with a home my grandchild's married. And they get divorced and want the money back. If they sell the house, I want the money back. That's a different animal than a gift. And so you need to get good advice because that's more in the nature of a loan. And that's a different story.
* OK, so be clear on what the-- if there's conditions around it what they need to be.
* Exactly.
* Trusts. That's a whole show. But give me a thought on trusts, what to think about.
* So, usually, you're going to see trusts when you're gifting, especially if the grandchildren are minors. That's when we have to start talking about trusts because you can't necessarily give directly to a minor.
* Now, a trust, there's kind of-- what a lot of people don't realize is it's a relationship. It's a situation where you're creating a relationship between the trustee, you, and the beneficiary. And so you can do that in two ways. You can do it while you're alive. It's called an intervivos trust or a testamentary trust. Very complicated things. So you need to get good advice about that.
* All right, let's finish with that on the good advice. I mean, all of this, I'm assuming is you're best to speak to an advisor who knows your personal situation, can kind of help you work through these things, right?
* So as I said, can you spare the money? So that's when your financial advisor, your investment advisor comes in. And then because these are complicated things, a good estate-planning lawyer, somebody that can see that these intersect different areas of law, and you need to have an understanding of all of those areas in order to properly advise your client about how this should be structured.
[MUSIC PLAYING]
* One of the best parts of being a grandparent, I'm told, is being able to spoil your grandchildren. But as kids get older, the gifts can get larger and-- let's face it-- sometimes a bit more complicated, whether it's supporting their education, sharing a large cash gift, or maybe helping with a down payment for a home. So how can you make sure your gifts don't come with unintended consequences for them or for you?
* Georgia Swan is tax and estate planner at TD Wealth. She joins me now with some things to consider when gifting to your grandchildren. It's interesting. You and I were chatting before. The big one is also just what it could mean for you. And that's something maybe grandparents, selfless, want to help, maybe not think all that through.
* So we'll talk about everything. But maybe let's start with the first decision you have is when to do it. Do you want to do it when you are still living and can see the benefit? Or do you want to wait?
* So that's actually it. When you do it while you're alive, you get to see the benefit of it, so an education free from debt or your grandchildren enjoying their first house. So that's always a wonderful thing.
* The problem with that is you have to make sure you can really spare the money. Because if you can't honestly say, I'm never going to need this amount, so whether I have medical issues or long-term care issues, I'm never going to need this money, then that's great. Do it while you're alive and enjoy what comes of it.
* But if you can't honestly say that I'm never going to need it back-- because you probably won't get it-- then maybe it's better to wait and do it through your will because then it's going to be a part of whatever's left over. So it's not going to affect your lifestyle while you're alive.
* Yeah, good point. Now, in terms of ways you can do it, I mean, one way you can do is you can give cash. You can give money. What do you need to think about?
* So when you're thinking about giving money, let's say, for example you want to give $200,000. The problem is you have to really think about what that is actually costing you. So $200,000 in cash is usually after-tax money. So if you're in the highest marginal tax rate, for example, that might have cost you $300,000 in order to make $200,000.
* You also have to think then, again, in the vein of can you spare it, that that's money now that's not going to be working for you. So you've lost the future investment opportunity for that money. So that's part of the consideration when I say, can you really spare it? What is it actually costing you to gift that amount?
* Yeah, and there's a lot to go through here. So I'm going to say a bit of a rapid fire on this one. So if you say, OK, maybe not cash, maybe it's a security, stock, maybe it's property, what does that mean for you?
* So, again, tax consequences because you can't-- let's say you want to gift the cottage to the grandkids. In that case, it's considered-- you can gift it under real estate law. You can transfer the ownership. But the problem is that it's going to be a disposition of that property to you. So if there's accrued capital gains, you're going to have to pay tax on it. If you want to gift money, for example, from an investment account, you're going to have to liquidate that account.
* There can also be issues-- I had a client once that wanted to gift a rental property. And they kind of wanted to do it to say, well, the rental property is worth $1 million. I'm going to have them pay me part of that. They're only going to have to pay me $500,000.
* That can create another tax problem, especially if it's an income-producing asset. Because there's something called attribution rules that when it goes at less than fair market value that the income ultimately that the grandkids would get can attribute back to you. So there's so many intricacies based on how you want to structure this so-called gift that you really have to investigate.
* OK, yeah, don't do it with the tax bill. Education, most of-- a lot of grandparents want to help with their grandchildren's education through an RESP.
* So absolutely. That's almost an indirect gift to your kids as well. Because if they're not saving for the RESP, they have more disposable income to do other things. So it's great. You get the bond, and you get the grant. But you have to be careful. If it's an RESP that you as a grandparent created-- so you're the subscriber-- you have to have special wording in your will that appoints a successor subscriber.
* Because if you don't, and the RESP hasn't been used, it's going to be collapsed. And the contribution amount-- so all the grants and the bonds-- go back to the government. The contribution amount will end up going through your will. So it's very important if you are the subscriber of the RESP to have that wording in your will to appoint a successor subscriber. That's a conversation you really should be having with the parents of the kids.
* When you set it up. What about a down payment for a home? I like all these lists, by the way. These are fabulous. But if you decide that, which is a wonderful gift, what do you have to think about?
* So that's the biggest one. That's the one I see most often. So absolutely. The first-home savings account, if your grandchild has opened one, you can gift them some money to top that up. You've got other tax-efficient ways of buying a new home. But certainly, you can also-- if they've gone part way to getting that down payment, you can give them a little bit more.
* Now, the thing that happens in that case is sometimes people want to structure that really as a loan. They say-- especially you see with a home my grandchild's married. And they get divorced and want the money back. If they sell the house, I want the money back. That's a different animal than a gift. And so you need to get good advice because that's more in the nature of a loan. And that's a different story.
* OK, so be clear on what the-- if there's conditions around it what they need to be.
* Exactly.
* Trusts. That's a whole show. But give me a thought on trusts, what to think about.
* So, usually, you're going to see trusts when you're gifting, especially if the grandchildren are minors. That's when we have to start talking about trusts because you can't necessarily give directly to a minor.
* Now, a trust, there's kind of-- what a lot of people don't realize is it's a relationship. It's a situation where you're creating a relationship between the trustee, you, and the beneficiary. And so you can do that in two ways. You can do it while you're alive. It's called an intervivos trust or a testamentary trust. Very complicated things. So you need to get good advice about that.
* All right, let's finish with that on the good advice. I mean, all of this, I'm assuming is you're best to speak to an advisor who knows your personal situation, can kind of help you work through these things, right?
* So as I said, can you spare the money? So that's when your financial advisor, your investment advisor comes in. And then because these are complicated things, a good estate-planning lawyer, somebody that can see that these intersect different areas of law, and you need to have an understanding of all of those areas in order to properly advise your client about how this should be structured.
[MUSIC PLAYING]
