Our Two Cents

September 14, 2023 | Rachelle Allen


Passing the torch - 5 proven strategies to pass down wealth

In an era where financial planning spans generations, parents often have a desire to leave a lasting legacy for their children. The fascination to provide a financial safety net, fund educational pursuits, or provide a meaningful inheritance is deeply ingrained. However, navigating the intricate landscape of wealth transfer can be fraught with complexities and hidden pitfalls. As parents contemplate the best avenues for securing their children's financial future, a critical need arises for an understanding of the various strategies, potential obstacles, and essential considerations.

We have compiled the top 5 strategies to transfer your wealth:

1. Your Will/Outright Distribution:

  • A will represents the most common way of estate asset transfer and is the most fundamental element of an estate plan. A will ensures your property will be distributed to your beneficiaries in accordance with your wishes. You can name your children as beneficiaries in your Will and the instructions only take effect upon your death.

2. Joint Ownership:

  • As part of the estate planning process, individuals will often consider establishing a joint account with one or more adult children. A joint account is a planning technique used as part of a strategy to seek to minimize probate tax.
  • Joint tenants with right of survivorship: Where the joint tenancy is between a parent and adult children, upon the death of the parent, the account may be considered to form part of the deceased parent’s estate. The adult children are required to demonstrate that the parent intended to gift the account and its assets to them. If the adult children are able to demonstrate this intent, the account will generally pass to them as surviving joint tenants, bypassing the estate and therefore, probate fees.

3. Trusts:

  • Assets can be left to a testamentary trust for the benefit of your beneficiaries. A testamentary trust is created through your Will and only takes effect at death. A testamentary trust allows you to control the timing and distribution of assets to your beneficiaries. The assets held in the trust are invested and managed by the trustee of the trust, with income and capital distributed to the beneficiaries in accordance with your wishes stated in the will.

    Typical situations where a testamentary trust might be used:
    • Trusts for minor children - A minor child cannot receive funds outright since they don't have the legal capacity to receive those funds and provide a valid discharge to the executor.
    • Trusts for a beneficiary with a disability - A trust to provide continuing financial support for a beneficiary with a disability. Passing the assets to a trust as opposed to making an outright distribution, may allow the beneficiary to maintain their eligibility for government disability support benefits.
    • Trusts for spend thrift beneficiaries - If you have a child who may not be experienced in handling finances, a testamentary trust may allow you to ensure the beneficiary does not exhaust the assets too quickly.
    • Living family trust: An inter-vivos trust (sometimes referred to as a living trust) is a trust that is created during an individual's lifetime. A living trust can be structured to provide the person gifting the assets (known as the settlor) with significant control and flexibility over the timing and amount of assets distributed to the trust’s beneficiaries, which could be your children.
    • The trust may be used to provide for adult children or a disabled child who requires ongoing financial support in a tax-effective manner.

4. Gifting:

  • The easiest method of transferring assets is to give them to your children prior to death. Gifting is frequently used to assist children with activities such as a home purchase or business financing. Generally, gifting an asset to an adult child is treated as a sale at fair market value, triggering any unrecognized capital gain. One drawback of gifting is that you relinquish control over the asset. As well, you may be exposing the gift to the child's creditors and family law claims if a marital breakdown occurs. You should consider whether the gift would be protected in the event of a separation or divorce under provincial family law legislation.

5. Life Insurance:

  • Transferring wealth to the next generation using life insurance can be an effective strategy. Life insurance serves one or two purposes: to create an estate for your children or preserve your existing estate.

    Here’s how to do it:
    • Purchase a Life Insurance Policy: Start by purchasing a life insurance policy. You can choose between term life insurance, which provides coverage for a specified term, or permanent life insurance, such as whole life or universal life, which offers lifelong coverage along with a cash value component.
    • Designate Beneficiaries: Designate your children as the beneficiaries of your life insurance policy. This will allow the insurance proceeds to be paid directly to your children. By naming a beneficiary this will minimize probate taxes on the value of the death benefit. The death benefit is not subject to income tax.
    • Determine Coverage Amount: The amount of coverage you require will depend on the financial needs of your children such as paying off debts, providing an inheritance or covering tax liabilities for your estate. Determining exactly how much and what type of life insurance is most suitable for your situation would be best assessed through the preparation of a financial plan and working with a life licensed representative.
    • Fund the Premiums: Ensure that the life insurance premiums are paid regularly. You can either pay the premiums out of pocket or use other assets, such as investments or cash, to fund the policy.
    •  Tax Advantages: While the premiums are not tax deductible, the life insurance proceeds are received tax-free.

The desire of parents of parents to leave to a financial legacy for their children is a testament to the enduring bonds of family. Yet, this endeavor is not without its intricacies and potential challenges. As we've explored the various aspects of wealth transfer planning, it becomes evident that informed decision making is paramount. Ultimately, the legacy you leave is not just financial; it's a reflection of your love, wisdom and enduring commitment to the well-being of your children.

Whenever you’re ready, here’s 1 way we can help.

We help high-net worth investors and entrepreneurs to grow and protect their wealth.

Vito, Eric & Rachelle




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