Skipping a generation in your estate planning

I’ve heard several people over the years say they never thought they would have so much money. A growing number of aging people have accumulated significant savings and investments from years of savings, investing wisely, inheritances, property dispositions or selling a business – and are looking for different options when it comes to minimizing taxes and structuring their estate plan.

Taking care of immediate children is still very much a priority, but it’s not the only one. Some of their children are often already well off financially and many are retired themselves.

We are seeing more and more cases where grandparents are leaving money to grandchildren, but there should be extra caution and professional advice when structuring plans to transfer wealth. Income splitting can extend to grandchildren and can lower taxes as a family.

The following are a few examples of how we have assisted clients in helping out their grandchildren.

Outright Gift

The strategy of gifting money to adult grandchildren can be very tax smart. A person who is aged 65 or older may have government benefits such as Old Age Security clawed back if income exceeds certain thresholds set annually. In many cases income taxes can be reduced and government benefits increased by gifting funds to an adult grandchild in a lower income tax bracket. We do not recommend significant gifts to minor children directly as this could violate what is commonly known as the attribution rules.

Registered Education Savings Plan

For grandchildren under 19, grandparents should consider the Registered Education Savings Plan. This is a fantastic vehicle to tax-shelter money, income split with family members, and receive government grants. I’ve had clients set up an RESP for every grandchild they have. They require a consent form from the parents, as there is a limit to the Canada Education Savings Grant.

Tax Free Savings Account

For grandchildren who have reached the age of majority, giving funds to contribute to a Tax Free Savings Account can be an excellent way to income split. Your grandchildren can use this account to build up funds to use one day as a down payment on a home. By moving the funds from a grandparent’s taxable account to a non-tax account this will also reduce the family tax bill.

Paying Down Mortgages

Let’s assume you have the option of investing $100,000 into a two year guaranteed investment certificate or gifting these funds to your granddaughter who is paying 4.6 per cent on her mortgage. The $100,000 would result in $2,000 of interest income which would be fully taxable. If the grandparent was in the 30 per cent tax bracket then the government would receive $600 of this money. If you’re in a higher tax bracket, the amount would be higher and you would also be in the position of potentially losing even more government benefits. Your granddaughter is currently paying $4,600 annually in interest on her mortgage and is not able to deduct the interest costs. By gifting $100,000 the government would receive $600 less, you may receive more government benefits next year, and your daughter would save $4,600 a year in interest costs and also have a reduced mortgage.

Buying a Home

Buying a home is perhaps the toughest financial hurdle for most young people to clear, as salaries are insufficient for many to qualify to buy even a basic home. In one case, a grandmother considered moving into an assisted living arrangement. She had a grandson and two granddaughters, who wanted to purchase her home, which has a $600,000 value. The grandmother has significant pensions and capital outside of her principal residence and does not need the full proceeds from selling the home. During a meeting we mapped out a plan where she gifted each grandchild $100,000. The grandson could purchase the home from his grandmother for $500,000 ($600,000 fair market value less the $100,000 gift). The grandson would then be able to qualify for a mortgage for $500,000, the proceeds of which could be distributed as follows: $300,000 to grandmother and $100,000 to each granddaughter for them to each use towards the purchase of a home.

Insurance Products

In a small number of situations where people are wishing to keep certain gifts out of public record, an insurance product is a solution. By naming a specific beneficiary the insurance proceeds would bypass one’s estate and avoid probate fees. We have also seen situations where grandparents have taken out a second generation insurance policy to leave a significant gift to grandchildren.