When is the right time to share your wealth?
Here’s what to know before making a financial gift.
CIBC
Jul. 19, 2022
2-minute read
While a will is an essential piece of an estate plan, it’s just one way to transfer wealth — and one that leaves the timing up to fate. Giving someone a financial gift when they need it, like when buying a house, may be more helpful to them then if they were to wait for your passing. You can also take pleasure in seeing the recipient thrive because of your gift.
According to a CIBC poll, 54% of Canadian parents say they plan to give a significant gift or early inheritance to their children or grandchildren.
Giving money during your lifetime can be rewarding, but it’s important to know if it fits with your other financial goals. Here are some of the main factors to consider when deciding how much of your wealth you can afford to share, and when.
Be generous to yourself first
It’s great to share the wealth, but you don’t want to give too much now and be short on cash in your later years. “Make sure you have enough savings and cash flow to cover your own financial needs,” says Carissa Lucreziano, Vice President of Financial and Investment Advice at CIBC. “It’s important to think long-term and consider your retirement income as well as how you plan to cover unexpected expenses, like additional healthcare costs.”
You also want to make sure you can continue to enjoy the lifestyle you want. If you’re drawing on your investments for income in retirement, having just enough saved could leave you in a difficult situation if the markets dip or inflation spikes.
Remember, it’s not an all-or-nothing situation. You may want to give a smaller financial gift throughout your lifetime, like helping your grandchild pay off a car loan. When you give money in smaller amounts over time, you can share your financial knowledge with the recipient to help them make wise decisions.
Writing a cheque isn’t your only option. There are different ways to transfer wealth that can help you spread out your gift over time and help you ensure the money is used the way you intended. For example, you could transfer assets to a trust for your child or grandchild with terms that outline how much of the trust will be distributed to them at different times. Your financial, legal and tax advisors can help you find the right option for you.
Don’t forget about the tax
There are different rules for transferring cash, real estate, shares of a corporation or other property, like a vintage car. You may be taxed differently depending on the type of asset you’re giving.
Cash may be the easiest way to give someone a gift. There are no taxes on monetary gifts for the giver or the recipient. However, if you’re pulling money out of an RRSP or an RRIF, you’ll pay income tax on the amount you withdraw. If you want to give real estate or investments, you’ll pay tax on capital gains from the increase in value of the assets.
Keep in mind that every country has its own set of tax rules. In some places there may be taxes on gifts, estates and inheritances. It’s important to review your specific situation with qualified tax and legal professionals in the jurisdictions where the giver and recipients live, as well as where the assets are held.
Have the talk with your family
“There’s no getting around it, money is an emotional subject,” Lucreziano says. “If you have a spouse or common-law partner, it’s important to make decisions about financial gifts together.”
Parents with more than one child often want to make sure they’re being fair with their gifts. If you’re giving cash, it’s fairly easy to slice the pie evenly. Other assets or property, like a car, a cottage or a family business can be more challenging to divide. These things may also hold a different sentimental value to each of your children. If your goal is to make things as equal as possible, then planning and communication is key. “Having a transparent discussion with each of your children about your plans can help avoid misunderstandings later on,” Lucreziano says.
Having a solid long-term financial plan that takes into account your future income and projected spending, may help you decide how much you can afford to give now without impacting the lifestyle you want later on. An advisor can help you analyze your financial situation so you can enjoy giving a gift to your loved ones while feeling confident about your own financial future.
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