June 19th, 2007


Blurb: During coming years, seniors will be transferring vast inheritances to their descendents.


Managing the trillion dollar transfer


By Peter Diekmeyer • Bankrate.com


Lead by the baby-boomers, the first of whom began turning 60 last year, Canada’s population, has been aging gracefully in recent years. Not surprisingly, the thoughts of many have been turning to future generations.


According to Decima Research, 71 percent of Canadians plan to leave an inheritance to their descendants. The numbers are huge. Close to $1 trillion in cash and other assets is expected to be transferred from seniors to their children in the years to come.


But the stakes are large too. Those who wait until the last minute, could inadvertently burden descendents with tax liabilities that diminish those inheritances substantially. In worst case scenarios, those who die or become incapacitated before they have had a will prepared may end up with little say in how assets are distributed. 


The basics of planning and leaving an inheritance

Experts say that the most important single step that Canadians who want to transfer assets to the next generation can do is to begin planning early.


“Gather and analyze personal and financial information, consult with family members and look at the big picture,” advises Wendy Templeton, Vice-President, Wealth Transfer and Estate Planning at BMO Nesbitt Burns. “A will is not an estate plan. Get practical and creative solutions from an expert.”


Proper estate planning can work wonders both in terms of making sure that your wishes are respected and that the tax liability of future generations is minimized. They can also play a major role in reducing family tensions.


For example disputes can easily erupt over non-financial matters such as the distribution of family memorabilia, which have limited financial value, but which can cause havoc if not handled correctly.  Discussing plans openly with kids well in advance, can help identify potential issues and provide all parties with the time to work out compromise solutions.


How to go about it: tax and legal rules

Of the biggest challenges that Canadians face when planning successions is keeping the government’s paws out. In fact three out of ten Canadians named taxes as the chief threat to their inheritance. Tax specialist Tim Cestnick, author of 101 Tax Secrets for Canadians 2007, suggests several tips to relieve potential liabilities.


“When deciding what to leave to whom, it is preferable that you leave assets that do not trigger tax liabilities to your children, such as cash, life insurance proceeds and assets for which it is unclear that their value has increased,” says Cestnick. “Leaving your RRSP to your spouse will provide a significant advantage. It still triggers a capital gain, however the gain only applies to the portion that exceeds the RRSP’s cost base. You won’t pay taxes on the entire value.”


Cestnick also advises cottage owners to prepare for transferring the property to successive generations by keeping detailed records of renovations, upgrades or improvements which would increase the asset’s cost base and thus reduce the tax liability, due to the deemed disposition tax provisions which kick in, when the owner dies.


Planning early is particularly important in the case of parents who own family businesses that they want to transfer to the next generation Cestnick says. Complex strategies such as “estate freezes” can significantly defer the tax liabilities. But such strategies need to be implemented early, often ten or more years before the actual transfer takes place, in order for them to generate optimal effects.


Get a will

In a worst case scenario, if the deceased’s wishes are not clear, a situation can arise in which dispositions of assets are made that are contrary to his or her initial intent. “Wills are very important,” says one financial expert. “You need a will to be able to direct how your assets are distributed.”


But what may be just as important, is providing power of attorney and personal care power to someone you can trust. Medical advances have advanced considerably in recent times. As a result, many Canadians now live many years in a state of total incapacitation before they die. During that time, you’ll want to be assured that all financial and legal matters are taken care of properly.


Living transfers

The average Canadian’s life expectancy is now approaching 80 years, up from 60 years for those born in the 1930s and 1940s. In fact, the “children,” that many Canadians now leave their wealth to are not that young anymore themselves.


An 80 year old woman, who leaves an inheritance today, who gave birth when she was 25, would be leaving her wealth to a 55-year old – an age when most Canadians are at peak earning years and enjoying reduced expenses because they are in the process of seeing their own kids leave the family nest.


Windfall cash will do your children a lot more good when they are 25 and struggling to come up with the down payment to buy a home, complete a graduate studies or pay off college debts, than it will when they are approaching 60, and their major worry is upgrading their golf clubs.


One element of a possible inheritance plan could thus include transferring a portion of one’s estate before death occurs, so it reaches your kids when they actually need it. Of course if you do that, better make sure that you won’t need the cash yourself later on. Because the surest thing about inheritances is that they flow downhill and not the other way around.


Peter Diekmeyer (www.peterdiekmeyer.com) a freelance business and economics writer.








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