7 Things to Consider Before Gifting Money to Your Children

By Calum Ross

This tax-efficient plan that is often incredibly appreciated (and needed) by your children does have some key advantages, but don’t forget to protect them and yourself from the pitfalls. Here are some things to watch and how to plan ahead.

Baby boomers are set to inherit a record $1 trillion from their parents over the next couple of decades. For those of you not good with math – that’s a lot of money! With their adult children struggling to pay off the highest ever level of student debt while trying to afford to buy a home, boomers flush with cash may want to lend their adult children a helping hand in the form of early inheritance (pun intended). Some will even tell their children to sell their estate after they have passed with an estate sale. If you are wondering – “What Is An Estate Sale?”, you can check out websites like antiquewisconsin.com as well as estate sale companies more local to you, so you can be prepared if this was to happen.

Making a gift to your adult children can be a good idea when it’s done properly. You’ll be able to see your children enjoy the fruits of your labor while you’re still alive and in good health.

But before you start lending money to your kids or decide to write your child a bank cheque, there are some important things you need to consider.

7 Things to Consider Before Making a Gift to Your Adult Children

1. Loss of Control: You’ll no longer be able to call the shots when it comes to your funds or property gifted to your child. Young adults and large amounts of money/assets often don’t mix well.
2. Health and Finances: Once you gift something, it’s a done deal; just make sure you won’t need it down the line if your health or financial situation worsens.
3. Property Claims: Although the gift may be intended for your child only, a gift could be claimed by your child’s ex-spouse, creditors, or heirs in the event that it is not properly planned.
4. Work Ethic or Lifestyle: You’ve scrimped, saved and worked hard to build your net worth. The last thing you want is for your child to blow your life savings in a manner that directly contradicts how you acquired wealth, to begin with.
5. Undue Influence: The legal definition is The unconscientious use by one person of his/her power over another in order to induce the other to compromise a property right. An example would be if you’re losing your mental faculties and your adult child convinced you to sign over your home to them. That’s a no-no to be avoided.
6. Distribution of Assets: Do you want to sell your home and give your child the cash proceeds, or sell it to them for less than fair market value? Both have different tax consequences.
7. Income Taxes: The only things certain in life are death and taxes. Proper tax planning is key to minimize the piece of the pie the taxman is entitled to.
   

Gifting Real Estate

Baby boomers in strong housing markets like Toronto and Vancouver are sitting on more wealth than they could have ever imagined. Over the last few years, we’ve seen house prices climb and mortgage rules tighten good news for homeowners, but not-so-good news for homebuyers and particularly young homebuyers who face tighter lending rules and large down payment figures.

This has dealt a one-two punch to many Millennials who hope to ever realize the Canadian dream of homeownership.

As adult children struggle just to scrape together the minimum 5 percent down payment, an increasing number of baby boomers are lending a helping hand. In fact, CMHC is probing just how much the bank of mom and dad may be skewing the real estate market.

If you’re thinking of lending your child a helping hand in the purchase of a home, you can avoid some of the risks mentioned above by registering a mortgage against the property. You’ll want to sit down with your lawyer or look for a lawyer that will provide legal services similar to this last will and testament Michigan law firm can, to update your will, where the mortgage can be forgiven or offset against your child’s inheritance. Regardless of how much you like your children’s partner of choice, this is just good business.

Lastly, don’t gift anything you may need or want back. You may be in good health right now, but who knows what your health will be like in your 90’s? Although you may have the benefit of being able to see your adult child enjoy your gift while you’re still living, it won’t be very pleasant if you have to significantly decrease your own standard of living if you have a major expense and/or don’t plan effectively. As with any estate, investment or mortgage decision. I strongly encourage you to consider in the context of the broader-based financial plan.

Have you ever gifted money? Join the discussion below!

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Calum Ross was ranked as the top producing mortgage broker in the country by Canadian Mortgage Professional Magazine. He holds both a B.Comm and MBA in Finance and recently completed a comprehensive Leadership Program at Harvard Business School. Reach him at: www.calumross.com.