When it comes to estate planning every individual is different. Younger people tend to dedicate little or no time to estate planning, yet as individuals age, they typically give this area of their finances more thought. Estate plans may differ considerably. Some plans focus on maximizing an estate, while others plan to leave little to none to beneficiaries.
Recently we have seen generous charitable donations from Bill Gates and Warren Buffet. A significant amount of their assets were donated while they are alive. To them it made sense to gift a portion of their assets now. They will be able to provide more guidance in controlling how the foundation puts the gifted assets to use.
Does it make sense for us non-billionaires to gift assets early? It may make sense for certain individuals to consider gifting assets prior to their death. The following are ten items to discuss with your advisor prior to gifting assets:
1. Satisfaction: Similar to Bill and Warren, you will be able to see how your hard work and wealth will benefit others. What could also happen though is the recipient of the gift may be non-appreciative and careless. If this is a possible or likely outcome we recommend spending time educating the beneficiary prior to them receiving the gift. Another option may be to gift a smaller amount now while you are alive and monitoring how the beneficiaries are able to handle the gift.
2. Privacy: Not all gifts are as public as those recently in the newspaper. When gifts are made to certain family and/or friends and not others it is easy to see how jealously could erupt. Making an anonymous gift is easier while alive. Many individuals may be surprised to know that if their will is probated then it is open to the public under Supreme Court Rule 64. Individuals may, on payment of the proper fees to the registry, be able to view a copy of your probate file. Beneficiaries, executors, and family members are able to view your probated file at no cost. Those individuals that are not a party to the will may view the probated file for a charge, currently $8.00 and make copies of the documents for a charge, currently $1.00 per page.
3. Contest: Assets that are distributed through your estate in accordance with your will may be contested. Do you feel that the beneficiaries may contest your will or how you have chosen to distribute your assets? If the answer is yes, then the simplest solution to avoid that outcome is to gift assets now. If you no longer own the asset in dispute, then there is nothing to contest.
4. Probate fees: Probate fees may be reduced considerably by gifting assets prior to your death. Last week we mentioned the pros and cons to establishing joint bank and investment accounts with other individuals. We reviewed the associated risks and the estate planning benefits (reduction in probate and other administration fees). The same essentially applies to amounts which are gifted; however, a gift is permanent and control is lost.
5. Administration Fees: Too much emphasis is often placed on reducing probate fees. The fee is not so onerous that one would prematurely gift assets just to avoid paying what is generally less than 1.4 per cent of the assets being probated. Individuals should factor in other savings such as accounting, legal, and other fees. The more complex your estate, the more fees that will generally apply. In British Columbia, executors are also entitled to a fee within certain limits.
6. Simplicity: Once we had a co-worker who mentioned that she never left home without cleaning her house. She wanted her place neat and tidy in the event that somebody ever needed to enter the house without her (in the event of an emergency or death). Having your affairs in order can provide you peace of mind.
7. Taxes: Prior to gifting assets it is important to understand the tax consequence, if any. Understanding the attribution rules and when they apply is important. Gifts to charities are often enhanced with a little planning. Significant gifts prior to your death will allow more flexibility to take advantage of tax credits. Gifting assets now may assist in reducing your future income taxes.
8. Income Splitting: Gifting assets is one method of income splitting worth noting for families. Understanding the attribution rules is important. The attribution rules generally apply when gifting to immediate family members. Understanding these rules and the different types of income are important especially as they relate to minor and adult children.
9. Avoid confusion: When it comes to non-financial personal possessions it makes sense to consider how those items will be distributed. Many individuals include an itemized list that is attached to their will. Gifting these assets while you are alive is one way to ensure they find their new home. We have all heard stories of families who fought over every single asset, regardless of its size or value.
10. Losing Control: After assets have been gifted, control has been lost. For some this may be a good thing as it will allow them to concentrate on more immediate concerns and may generate greater peace of mind. Another possible benefit of gifting assets may include an individual receiving more social benefits because of their reduced income. Gifting assets for some may result in becoming financially dependent on others, such as your family or social assistance. It can be a strange dilemma when looking at certain government benefits – often it pays to be poor.
We recommend that those individuals that are considering gifting some of their assets first meet with their professional advisor to understand the advantages and disadvantages.