Intergenerational Wealth Transfer Discussion Series

It’s no secret that the real estate market in Canada is red hot according numerous pundits and newspaper articles. I do not wish to debate the merits of this, however, from doing over 80 workshops on various financial literacy topics, I can’t recall when I did NOT have a real estate related question. Actually, the exception would be when I hold seminars on How to Teach Your Kids About Money! Guaranteed, at all of my adult workshops I will get one person asking; in fact, just the other night at a workshop on Estate Planning, someone asked me if it is a good idea to add their adult children to her property.

So, lets take a hypothetical example to understand reasons for doing so.
For those who don’t know what “probate” is, it is the fee you pay to the Ontario courts to validate your last will and testament: $250 on the first $50,000 value of your estate and a further 1.5% on the value above this, with no cap. Sounds like a lot? To some people it is enough to warrant them planning their affairs to avoid this tax without fully knowing the unintended and sometimes catastrophic consequences.

• Kim is retired, widowed, aged 65, has a house in Toronto and a family cottage that’s been in the family for “as long as I can remember”; she has two daughters Jane and Judy.
• Jane and her husband have a business and Kim wants to help her out since most of their savings are used to run the business.
• Judy is also married with two children but never good with managing money.
• She attended a couple of seminars (not mine) and decided to put the cottage in joint ownership with her daughters to by-pass probate taxes.
• What the heck, for fun lets say she decided to put her home in Toronto on joint title too.
• Kim figured that after she died, her daughters would acquire full ownership with no probate taxes to worry about and the properties stay in the family.

Things she forgot to consider:
These are only some of the potential uncertainties she did not consider in planning her affairs with no professional advice. Often a good place to start is a family caucus chaired by an independent estate planning professional to identify the issues, and go over solutions that were professionally constructed. I hope you get this conversation started with your family sooner rather than later.

• Taxes – CRA will be looking for taxes owed on 2/3 of the cottage being gifted to the daughters; we will assume the Toronto home is designated as her principle residence.
• “Stays in the family” – Should either of the daughters’ marriages go south, the husband(s) now has a partial claim on these properties.
• Death – what if one or both daughters die before Kim? Their husband(s) are now joint tenants with Kim. What happens if Kim and Judy die?
• Creditors and Debts – Should Jane’s business also go south, the creditors can apply to cease these assets.
• Longevity – what happens if she lives a very long life and needs more money? What is her retirement income projection and plan?
• Loss of Control – will the daughters agree to sell it? How will their husbands feel about it?
• Time and ongoing upkeep costs, land transfer taxes – who does what and pays for what?

This is a classic case of the “probate tail” wagging the “estate planning dog”. Please stay tuned for possible solutions on our next blog about using Alter Ego Trusts / Joint Spouse or Common-law Partner Trusts.

About the author:

David Duong is a Wealth Consultant with Wealth Stewards Inc., providing wealth enhancement strategies to successful business owners, achievement oriented professionals, affluent retirees, and successful new Canadians who want to get acclimatized to their new home in a financial sense. David’s practice focuses on four core pillars of financial management: tax minimization, insurance and risk management, sound investing*, and estate and succession planning solutions.

David enjoys volunteering as Area Leader for the Chartered Professional Accountants of Canada’s Financial Literacy Network over the past three years, and is a past Advisory Board member. He has conducted over 80 workshops on various financial literacy topics in the Greater Toronto Area ranging from How to Teach Kids Your Kids About Money to Estate Planning.

Feel free to call or email him with any questions or comments:

David Duong, CPA, CMA, CIM®, B.Comm

Direct: 416.268.2688 or Email: dduong@wealthstewards.ca

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