Estate planning is a complex field, so it is in your interest to consult experts to ensure that your estate is transferred according to your wishes, especially if you want to bequeath a part of your assets to your children or your grandchildren.
Christelle Malenfant, a notary with our Wealth Management team, answers a few questions on intergenerational legacies.
What is meant by intergenerational succession?
- It involves putting in place a structure that provides for the use, preservation, continuity or transfer of your estate or your business to new generations. Most of the time, these generations are in your family line. If you own a business, it’s also possible that the future generations are a partner, employees or another person.
Can I name my grandchildren and my great-grandchildren as heirs in my will?
- Yes, of course. However, you will have to take many factors into consideration such as the age of the heirs and the tax impact of the legacy. Above all, determine your objectives so as to choose the best solutions to achieve them. You should also assess how the devolution of your property will be carried out: will it be bequeathed in full ownership, or through a testamentary trust? Intergenerational estate planning requires an up-to-date will which evolves with the testator and the heirs.
How can I bequeath a part of my estate to my grandchildren and what are the advantages?
- The most common option is to set up a testamentary trust, which provides for the protection and control of the assets of your estate. The testator determines how the income of the trust will be distributed to the beneficiaries and how they will have access to the capital if, for example, the income of the trust is insufficient to meet their needs. A capital encroachment clause will therefore be included in the will which will specify what proportion and how often the capital of the trust will be paid to the beneficiaries.
Know that the beneficiaries of the income of the trust may be different from the beneficiaries of the capital, although they are often the same persons. So be sure to clearly spell out your objectives so that your testamentary trust is set up according to both your wishes and the needs of your beneficiaries.
From a tax standpoint, which options are the most beneficial for the estate as a whole?
- When it comes to will planning, tax considerations are key because you don’t want Revenu Québec and the Canada Revenue Agency to be your principal heirs! If the testator has a spouse, the best option is full devolution of the assets to this person, provided that this spouse is recognized as such by the tax authorities. This allows for a tax deferral, in other words the tax impact will be postponed until the death of this spouse. Be careful, though: in the case of a reconstituted family, this strategy may not be in line with your wishes.
In certain circumstances, a legacy of an RRSP or an RRIF to minor children (who are financially dependent on the testator) allows you to spread out the tax burden through the purchase of an annuity which will be paid annually to the child and taxed in his hands until the age of majority. So make sure your estate plan optimizes all these aspects, without favouring one at the expense of the others.
Is it recommended to create a testamentary trust following your death and to appoint your grandchildren as beneficiaries?
- We often set up testamentary trusts for grandchildren considering their age. For example, if a minor grandchild inherits more than $25,000, the liquidator will have to inform the Public Curator of Québec. The tutor to the child will then have to establish a tutorship council, which will have to report annually to the Public Curator. By setting up a testamentary trust, this situation can be avoided
If you have grandchildren with disabilities or with special needs, this can also favour the creation of a testamentary trust. Be aware, though, that poor planning could jeopardize the government benefits to which the child would be entitled. Determine your objectives from the outset and surround yourself with professionals.
Is it complex and costly to set up and manage a testamentary trust?
- Since it must be created in a will, know that preparing a testamentary trust is more costly than drafting a will without a trust. Despite this, setting up a trust allows for the protection and control of the bequeathed property. Without a trust, the testator cannot be sure that his estate will be transferred to future generations. And if your estate is more substantial, a testamentary trust is an important factor to consider in your estate plan.
Can taking out a life insurance policy with your children or grandchildren as beneficiaries be an effective tool for the intergenerational transfer of assets?
- It all depends on the estate plan and the testator’s objectives. One thing is certain: by buying life insurance, the policy owner can be sure that the persons appointed as beneficiaries will receive a sum of money after the death of the insured. Since this insurance benefit is not part of the assets of the estate, the beneficiary can use it as he pleases. However, be sure not to appoint minor beneficiaries if the insurance benefit they would receive is more than $25,000, because complications could arise involving the supervision of the Public Curator of Québec and the establishment of a tutorship council.
Contact an advisor with the Financial to discuss the intergenerational transfer of your assets.
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