Thinking About Gifting Funds to Adult Children?Christopher Briggs, RRC®, Wealth Advisor
Most of us have heard the statement: “back in my day, I walked uphill both ways to get to school.” But given the rising costs to own a home or earn a higher education, perhaps kids these days don’t have it as easy as we may think. If we look back 35 years, the average cost of a home was only 1.6 times annual family income; today, it has climbed to around eight times average income. Tuition costs have also risen faster than inflation. One thing in today’s favour? A mortgage today comes with lower interest rates—if you can afford it!
A: 1984 figures: Globe & Mail “2012 vs 1984: Young Adults Really Do Have It Harder Today”, R. Carrick, 12/18/12; B: cbc.ca/news/business/crea-house-price-march-1.5098120; C: Statistics Canada Table 37-10-003-01; D: Statistics Canada (after-tax) figures; E: Bank of Canada v122497, CANSIM 027-0015; F: Adjusted for inflation using Bank of Canada inflation calculator, www.bankofcanada.ca/rates/related/inflation-calculator/
Given these financial challenges, we are often asked about gifting money to adult children. There are other reasons to gift funds: it may be fulfilling to see funds put to work while you are alive or when most needed by a child; some wish to die with as few assets as possible; and others wish to take advantage of income-splitting opportunities.* If you are thinking of gifting funds to adult children, here are three things to keep in mind:
1. Plan Ahead, with Care
Before you consider gifting, ensure you will have sufficient funds for your own retirement. It isn’t unheard of to have a situation in which parents have suffered financial difficulties down the road because too much was gifted to children. Often, contingencies such as health care aren’t adequately factored in. Planning for longevity and its associated costs is something we can assist with. As life expectancies rise, this becomes more important than ever.
2. Let it Go
If funds are truly a gift, there should be no strings attached. One concern that parents have if children are married/common-law is what happens in the event the couple splits. If there is a desire to protect funds in the family, this should be planned from the onset. Various arrangements, if executed properly, may be viable alternatives to a gift. For instance, if funds are to be used to purchase a home, consider gifting them to a trust for the purchase. Or, a loan may be chosen over a gift. As family law varies by province, seek legal assistance in the province where the child resides.
3. Clarify to Avoid Future Discrepancies
It may be beneficial to create and retain documentation to avoid future disputes. If the intention is to eventually equalize your estate between multiple beneficiaries, the gift could be structured as an advance of a beneficiary’s future inheritance. Either way, this should be clearly communicated or documented. There have been situations in which family members have questioned past gifts when settling an estate.
*The tax rules for attribution of income and tax on split income should be considered before implementing income-splitting measures.