Planning Considerations for Gifts to Adult Children

By Heather Rivers, BA, CFP®, FMA, CPCA® 
Manager, Financial Planning and Education,
Odlum Brown Financial Services Limited

Families are increasingly contemplating ways to transition family wealth to younger generations, often with the goal of easing the financial stress from higher living costs and interest rates.

When helping loved ones financially, it is important to make all decisions thoughtfully and with awareness of the potential legal implications that could arise from your decisions. A well-guided approach to cascading wealth while you are alive or after you are gone can help avoid family conflict.

This article discusses some planning considerations and techniques to help you get started and is intended as a primer for further personalized legal advice to understand your options and opportunities.

Considerations for Real Estate
With the growth of the Canadian housing market, some parents and grandparents are stepping in to assist their family members with rent, a down payment on their home or mortgage payments. In BC, 41% of first-time homebuyers receive financial support from family in making their purchase.¹ In these scenarios, all involved parties should carefully consider whether such financial assistance is intended as a “gift” or a “loan.”

For example, consider how the following events would be managed:

• The provider dies. Should the amount be deducted from the recipient’s share of the deceased’s estate?
• The provider encounters a financial setback such as a major health issue, job loss or business failure, family breakdown, death of their partner, or simply wants the funds back.
• The recipient and provider become estranged.
• The recipient’s marriage or common-law relationship ends, and family assets and liabilities would be divided.
• The recipient dies.
• The recipient faces claims by creditors.
• The property is sold.

Having a clear understanding of the terms of the financial assistance at the outset can help avoid ambiguity or conflict in these types of scenarios.

Family Law Considerations
Not all relationships endure for life, and a couple’s money, home equity, and other assets and debts can be divisible under provincial or territorial family law after a relationship ends. Therefore, understanding how family law applies to a gift or inheritance, including a mortgage lump-sum payment, is important when contemplating making gifts and creating inheritances.

For example, under BC’s Family Law Act:

• Non-married individuals who are classed as spouses, or colloquially referred to as common-law spouses,² are treated similarly to married spouses for property division.
• Certain property may be “excluded” from property division, such as gifts or an inheritance received by one of the parties to the relationship.
• While the initial value of excluded property may reduce the assets to be shared, growth and income derived from excluded property may still be divisible.
• If excluded property is not kept separate from non-excluded property, it is generally more difficult to have it “excluded.” For example, gifted funds used to buy a jointly owned home or repay a joint mortgage may be difficult to trace and treat as an excluded asset.
• Couples can make relationship agreements before or during their relationship, and such agreements are generally given considerable weight unless they rise to the level of being significantly unfair. Such agreements can therefore be more useful than before BC’s Family Law Act came into force in 2013.

Sample Discussion Points with Your Legal Advisors

• Creating family law agreements: Couples should consider creating relationship agreements (commonly called prenuptial, marriage or cohabitation agreements) before or during their relationship to clarify how assets, debts, gifts, inheritances and growth would be divided if their relationship breaks down. Both parties should obtain independent legal advice.

• Updating family law agreements: As the relationship and financial circumstances evolve, agreements should be reviewed with legal advisors. For example, before a gift or inheritance is received or comingled into other family assets.

• Keeping gifts and inheritances separate: Particularly if spouses or partners disagree with how inherited or gifted amounts should be handled, it may be prudent to discuss ways to keep inherited or gifted assets clearly separated, such as in separate bank and investment accounts (under sole name of the original recipient), investment in separate real estate or so on. Keeping detailed records and documentation of inherited or gifted assets, such as the will or beneficiary designation documents for an inheritance, gift letter, bank statements and/or any other relevant paperwork, can help establish the initial value of these assets at a later date. It is incumbent on the spouses themselves to maintain these records, and it is risky to rely on financial institutions to provide their records in the future; financial institutions do not generally retain records indefinitely.

• Using mortgages or promissory notes: Under advice from your legal professionals, weigh the pros and cons of making a gift or loan, and clearly document your intentions. Use appropriate legal instruments to ensure clarity: for example, providing a gift letter, placing a second mortgage on property title or creating a promissory note.

• Using trusts: Inheritances provided through your will can either be bequeathed as an outright gift to beneficiaries or held in trust. Using a trust can offer certain guardrails, such as how and when beneficiaries can access funds, as well as potential protection from creditors. For example, a trust deed could stipulate a staggered release of funds at different ages or provide the trustee(s) discretion over distribution amounts and timing.

Conclusion
By taking proactive steps, you can plan to provide a wonderful legacy to loved ones and ensure lasting benefits while minimizing potential risks and challenges. We emphasize the importance of consulting your family and estate lawyers to determine what approaches may be suitable for your specific situation and under your local laws.

Ask your Odlum Brown Investment Advisor or Portfolio Manager for a copy of our article “The Perils of Joint Ownership” if you may also be contemplating placing investment accounts or real estate in joint names with an adult child or grandchild.

¹ https://globalnews.ca/news/9787296/first-time-homebuyers-bc-borrow-money-from-family-report/
² We encourage you to check with your legal advisor for more details about your jurisdiction’s definition of a common-law relationship, including whether common-law relationships give rise to property division rights in the same form as married spouses and property division in family law.

The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice to be relied on without an individual first consulting with their financial advisor to ensure the information is appropriate for their individual circumstances. Odlum Brown Financial Services Limited is a wholly owned subsidiary of Odlum Brown Limited offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.