The idea of parents distributing assets to children, while the parents (or one of them) are still alive, is popular. One of the main reasons that some people do it is to avoid the cost of administering an Estate.
Gifting will shrink the Estate’s value, and in some cases may even leave no Estate. Some examples of this gifting include when a parent transfers title in their house to their child(ren), adds a child(ren) to their bank account(s) as a joint account holder, and gives away jewellery.
Alas, such actions do not come without cost and risk.
Strictly speaking, the transfer of a title by a parent to a child is a disposition (that is, a sale of the property). Where the property transfers is not their principal residence, there is a capital gain.
And, for tax purposes, the child acquires their interest at fair market value. If the child does not live at the property, it is not their principal residence either. That gives rise to a potential capital gain.
Therefore, if a parent wants to transfer an asset to a child while they are alive, in principal there is nothing improper, provided they consider the transfer carefully and seek advice.
This past summer, reasons for judgement were released in the case Palmer v. Palmer. The B.C. Supreme Court’s decision reveals what can happen when people do incomplete planning.
The parents in this case owned three properties, and wanted to gift one to each of their three (adult) children in such a way that the distribution to the children was equal.
To help fund their living expenses, the parents asked each of the children to grant a mortgage on the property they received (in the amount of $500,000) and to pay the funds to the parents.
Each property was worth more than $500,000. One property per year was transferred between 2007 and 2009.
Two of the three children each received one of the properties and granted mortgages. The third child received the other property, but failed to grant a similar mortgage. Funds were not paid to the parents.
The parents had sought the advice and help of their Accountant to calculate the adjustments that would create an equal distribution. But the job was not completed, and the children rejected the calculations the Accountant did prepare.
In addition, the Accountant did not follow the parents’ instructions fully; he added some factors of his own creation to his calculations.
Though the Court found the children not to be good witnesses, it ultimately held that the meeting the parties held when both parents were alive did result in an agreement on how to calculate equalization in the gifting among the three children. The Court also held that equalization was to be calculated without any consideration of tax issues.
The parties then had to revise the calculations.
The parents had good intentions, but in the end their planning and process were flawed.
With three properties, the parents could simply have completed their Wills, leaving equal shares of their entire Estate to each child. Given this litigation, it likely would not have been any more expensive to let the Will of the surviving parent be Probated.
Whatever plan the parents had was not mapped out in full at the planning table. That should have been done to make clear to everyone not only what they sought to achieve with their gifting, but how their plan would be carried out.
The parents conveyed one property per year over three years (presumably, to avoid a large tax bill in one year) but without concluding a plan for how to equalize the distribution, given all the loans and other financial assistance given to their children.
In my view, the parents should have taken more time to work through their equalization formula with their advisor.
Any distribution of assets that parents want to make while alive should be thought through carefully, and at length. One option will always be whether to not proceed with it at all.
This column ran in the Richmond Review on October 3, 2014.