Author Topic: Family trusts, capital gains, transfer before death.  (Read 974 times)

K-ice

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Family trusts, capital gains, transfer before death.
« on: January 26, 2018, 04:54:19 PM »
Hi Canadian gurus,

Does anyone have any knowledge on transferring property to children before death? 

I am pretty sure this is best done with a living family trust but it could also be some form of joint ownership.

I am actually asking from the point of view of the initial contributor, a beneficiary and for a friend.

But let's start with one scenario:

The property has been in the family for years and has 2 components, part of it is a primary residence and part makes business income. (Imagine a triplex, but not exactly) I do not think the title is that easy to separate.

Their would be advantages to transferring today as you could avoid any future capital gains that might happen between now and death.

Giving with a warm hand is "better".

If it is transferred to the children now it is protected from future second spouses.

It is better to settle this now before it becomes a story on the "inheritance drama" page.

I worry about a few things:

Transferring might trigger a deemed deposition and I believe the tax on the capital gains needs to be paid within a year. No one can afford this tax at this point in time.

I know these kinds of deals can be arranged with a clause that allow the parent the right to live on the property until death. Any problem with these? 

I wonder about who would pay the expenses on the property, the parent living their or the children.

What if the parent actually needs the money from this asset later in life for retirement?

What if the kids, who now jointly own the asset, get in financial trouble/divorce?

I worry about family dynamics and the conflict between trustees and beneficiaries.



I do plan to get professional help setting this up but right now I do not even know where to start and the MMM crowd has good ideas. 

https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/the-benefits-of-putting-a-cottage-in-a-family-trust/article11790723/

https://www.ggfl.ca/the-use-of-family-trusts/

^^ those were useful but I'm still very unsure.

 

RichMoose

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Re: Family trusts, capital gains, transfer before death.
« Reply #1 on: January 27, 2018, 11:29:23 AM »
Hi Canadian gurus,

Does anyone have any knowledge on transferring property to children before death? 

I am pretty sure this is best done with a living family trust but it could also be some form of joint ownership.
There are different ways to skin a cat and it's best to consult a lawyer and accountant. These things can get complicated really quick and seemingly small variables can make a big difference in the best options to choose.

I'll try answer a few of these based on the bit of familiarity I have...

The property has been in the family for years and has 2 components, part of it is a primary residence and part makes business income. (Imagine a triplex, but not exactly) I do not think the title is that easy to separate.

Their would be advantages to transferring today as you could avoid any future capital gains that might happen between now and death.
Yes, future capital gains go to the trust.

Giving with a warm hand is "better".

If it is transferred to the children now it is protected from future second spouses.
Not always... Divorce lawyers are going after trust assets hard these days since they are so common in wealthy families. While trust assets used to be bulletproof, my understanding is that the increase in value to the beneficiaries during the marriage/CL status is up for grabs now. This means valuations of trust assets at multiple points, accountant audits, and all that lovely stuff. This may depend on your province though.

Transferring might trigger a deemed deposition and I believe the tax on the capital gains needs to be paid within a year. No one can afford this tax at this point in time.
Yes, if the property is sold to the trust as fair market value by the settlor. There are other ways of doing this through a loan structure at the pescribed interest rate. A lot of this stuff depends on how the property ownership is currently sructured.

I know these kinds of deals can be arranged with a clause that allow the parent the right to live on the property until death. Any problem with these?
Not necessarily, just have a good estate lawyer write up a life estate arrangement. Very common in estate issues and trusts. Just make sure they don't get altered in the settlor's favour after the trust is established.

I wonder about who would pay the expenses on the property, the parent living their or the children.
Is it run as a business? Normally the trust is still separate from the corporation, so the corporation pays the expenses. Be very careful about setting up a trust where the settlor gets ongoing benefits from the trust. It can render the whole trust invalid from a tax perspective.

What if the parent actually needs the money from this asset later in life for retirement?
Normally the parent would retain preferred shares of a corporation that provide income to them. There's also the loan option. Depending on how thet trust was established, a parent might be a trustee which gives them priviliges over flow of money, including making sure they are provided for. But once a trust is established and common shares are transferred, it is not easily undone. Playing with the structure, especially by a settlor, is a no go.

What if the kids, who now jointly own the asset, get in financial trouble/divorce?

I worry about family dynamics and the conflict between trustees and beneficiaries.
Typically a trust can be opened up if there's marriage trouble or other issues with the beneficiaries. It can cause big headaches in valuation of trust assets, but normally the trust would survive intact. Attacking assets in a family trust is a common tactic used by divorce lawyers.

These family problems and infighting are always an issue if there are jointly controlled assets. No different from family cottage fights, fights over estates, or anything else.

K-ice

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Re: Family trusts, capital gains, transfer before death.
« Reply #2 on: January 30, 2018, 01:29:07 AM »
Thanks. Iíve got a lot to think about.