With unprecedented wealth poised to transfer to the next generation, the creators of that wealth are giving serious thought to how they want to build a strong, lasting legacy.
Minimizing estate and gift taxes has always been important, but “our clients today want to transfer their family values and to have their legacy managed in a way they deem appropriate. And with people living longer, parents and grandparents are making lifetime gifts to experience the joy of watching younger generations benefit.
By allocating funds properly and employing tax-advantaged financial tools, you can help future generations inherit family wealth the way you intend. There are several options for making tax-efficient gifts that give you more control over how your gifts are used.
Set Up a Trust
In Canada, if you are over 65 years of age you can transfer assets into special types of trusts tax free which allows you to control your assets and enjoy the income while you live but which distributes your capital to your beneficiaries when you die. Many prefer to provide for the distribution of their capital to beneficiaries while they are of strong mind rather than having worried potential beneficiaries ask for a new will when you are near death.
In Canada, a person can set up a principal residence trust to better protect their home from future creditors while continuing to enjoy his or her principal residence capital gains exemption.
A trust is created when a settlor (the person who makes the trust) transfers certain specific property (typically a gold or silver coin, but also cash or land or personal property) to another person called the trustee. The settlor and the trustee agree that the trustee, however, must hold the trust property for people called the beneficiaries of the trust for a certain length of time (typically, not longer than 80 years in British Columbia). Although the trustee is listed as the legal owner of the trust property, in fact it is the beneficiaries who are the true owners (the beneficial owners) of the trust property.
In a sense, a trust arrangement allows you to have your cake and eat it. Because a trustee is only a legal owner of the trust property, he can say “I don’t own it”. And because the trust document does not necessarily give the trust property outright to a beneficiary, the beneficiary can also say “I don’t own it, either”. This sort of benefit is directly useful for asset protection.
Trusts are an important estate planning tool, allowing you to specify how and when your beneficiaries can access certain assets. However, the costs of setting up and maintaining a trust should be estimated in advance. They include set-up fees, legal fees, administration fees for as long as the trust is in existence, and fees when a trust is wound up. If you’re appointing a professional trustee, make sure you ask for a list of all the fees that will be charged annually for the management of the trust and distribution of assets to beneficiaries.