A “living inheritance” is money given to kids or grandkids now instead of waiting to bequeath it through a will.
In Canada, especially among the baby-boomer generation (born between 1946 and 1964), it’s becoming more and more common.
The reasons are simple: younger generations can’t afford to buy their own homes, escape the debt trap, and have access to the same standard of living their parents and grandparents had.
The biggest need is for money gifts in order to help adults make downpayments on homes.
Research by Mustel Group and Sotheby’s International Realty Canada shows that in 4 of Canada’s biggest cities (Toronto, Vancouver, Calgary, and Montreal), no fewer than one third of baby boomers either have already given, or are planning to give living inheritances to relatives in order to help them purchase homes.
Baby boomers know that with the ever-increasing price of homes, and the ever-increasing difficulties in obtaining a conventional mortgage, their younger relatives would simply not be able to enter the housing market without a financial gift.
Entering (and remaining in) the housing market in Canada is the number one reason Canadians choose to share their wealth through living inheritances. Without financial support it is simply impossible for many Canadians of subsequent generations, especially those of the Millennial or Generation Y cohort, those born from 1977 onwards.
The managing director of tax and estate planning at CIBC Wealth Strategies Group, Jamie Golombek, said “They [the parents and grandparents] realize that they [the younger generations] have a plan, they’re in good shape in terms of their own retirement, and they would like to see the kids enjoy the money while they’re still alive.”
Many Canadians aged 55 and up, who work with their financial advisers, realize they have enough to live on and the chances of running out of money are slim. Therefore, the option to share some of that surplus with relatives is a way to make a meaningful contribution to their lives.
Traditionalists or Silent Generation: Born 1945 and beforeBaby Boomers: Born 1946 to 1964Generation X: Born 1965 to 1976Millennials or Gen Y: Born 1977 to 1995Gen Z, iGen, or Centennials: Born 1996
Fortunately in Canada, gifts are not taxed as income for the recipient, and furthermore need not be reported. This is another reason so many older Canadians prefer passing on an inheritance (or a part of it) in cash while they are still alive.
The tax implications are different when the living inheritance is passed on in the form of a securities portfolio (stocks, bonds, etc.) or property. In these cases, the recipients of the living inheritance might face capital gains tax if the gifts have appreciated in value. If you give a property (a home, a ski-chalet, a cottage, etc.) as a living inheritance, that property is deemed to have been sold at fair market value, regardless of whether the recipient paid you a penny for it or not. The capital gains tax applies when there is a difference between whatever the parent (or grandparent) paid for the property, and its current fair market value. Remember, any improvements, renovations, or upgrades that the parent or grandparent made to the property will raise its value. There are not many properties in Canada that haven’t appreciated over the past couple decades. Some, like cottages on Ontario’s coveted Muskoka region, have appreciated ten-fold or even more.
Another benefit of living inheritances is distributing a fair share of the family estate to each family member. If one child or grandchild receives money, and another receives a property, then the latter will probably owe capital gains tax, while the former will not.
References:
Eddie, David. “I have eight grandchildren I want to add to my will. How do I give them money without upsetting their parents?” The Globe and Mail. April 29, 2019. (https://www.theglobeandmail.com/life/relationships/article-is-it-fair-to-leave-money-equally-in-my-will-for-my-grandchildren/)
Hensley, Laura. “Living inheritances are booming in Canada, here’s why.” Global News, Smart Living, Money. October 30, 2018. (https://globalnews.ca/news/4607059/living-inheritance/)
Hodges, David. “The tax benefits of giving your heirs money while you’re still alive.” The Globe and Mail. (The Canadian Press). June 29, 2017. (https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/the-tax-benefits-of-giving-your-heirs-money-while-youre-still-alive/article35498157/)