When are your kids old enough to inherit?

When I talk to clients about the age at which their children should inherit their estates, the clients' responses are all over the map. Some are so protective (or mistrusting?) that they want to make sure their children don't get anything at a young age. I've had clients set the inheritance age as high as 65, with the children's shares to be held in trust until then. On the other end of the spectrum, some parents say that if the kids blow the inheritance by the time they are out of their teens, who cares?

Most are somewhere in the middle.

Parents usually want to protect against a young person inheriting money before they really understand the value of a dollar, or are vulnerable to other people. The trick is figuring out at what age a child is ready for that responsibility.

A new article from http://www.capitalmagazine.ca/ talks about this issue, with reference to the late singer, Whitney Houston. To read the article, click here.

The attached photo is also from http://www.capitalmagazine.ca/, courtesy of Starpulse.com.

Am I taxed when I inherit my Dad's house?

This is a question I'm asked often, and was asked again today, so I thought I'd take a few minutes to share some information about this.

It isn't possible to give a "yes" or "no" answer to this question because a lot depends on the specific facts. But usually the situation giving rise to the question involves a parent dying and leaving his or her only house to a child. In other words, there is only one parent's name on the title to the house (as opposed to a title with joint names on it). And note that a child must be of the age of majority in that province to inherit the house.

Because the house is real estate, there will have to be a Grant of Probate or a Grant of Administration issued by the court before the house can be transferred to the child. There is a probate fee involved, and a fee to the Land Titles Office for their services. These fees are always paid by the estate, even if it means that the house has to be sold to pay them.

Assuming the Grant is issued and all fees are paid, title to the house will pass to the child. There is no capital gain assessed on the transfer of the house from the parent to the child because it was the parent's principal residence. If the Will instructed that the house be sold and the money given to the child, there is still no capital gains tax on the transaction.

If the child inherits the parent's house and later decides to sell it, the tax implications depend on several factors, including whether the house is the child's principal residence or not. So even though the child may receive the home without paying tax, he or she might have to pay tax when the house is sold or transferred.

As a general rule, beneficiaries in Canada don't pay tax on inheritances from Canadian estates.

Parents should always consider a trust for children

While I don't think that all parents must include a trust for children, I do agree with the statement that they should consider it. Trusts are flexible and easier to set up than people may realize. Talk to your estate planning lawyer to find out what trusts can do for your children. Click here to read this article from lawyer Ken Laino.

Attached photo is also from that article in Asset Protection Law Journal.

At what age should children inherit money?

Today I met with clients who wanted to discuss a very common question, that of the age at which their children should inherit money should their parents both pass away.

Individuals cannot inherit money if they are under the age of majority. Therefore if parents state in their Wills that their children may inherit at an earlier age, the clause would be invalid. The child's money would be held in trust until his or her 18th birthday (or 19th in some provinces).

Parents can, however, provide that the child inherits at a later age. Over the years I've talked to hundreds of parents about this issue, and they are almost unanimous in the opinion that 18 or 19 years old is too young to inherit money. The larger the potential share for the children, the more concerned the parents become about how the children will handle a sudden windfall.

The concern is sometimes that the child will "blow" the money by extravance, or that the children will lose motivation to work, study or otherwise apply themselves in life. In other cases, the parents fear that the child might be taken advantage of financially. The purpose of the trust, therefore, is to protect the children and their inheritance. The challenge is to balance that protection against "ruling from the grave".

The solution is to set up a trust for the children by stating the terms of the trust in the Will. After the parents have passed away, each child's share is invested. The lawyer will draft the trust to meet each client's needs and goals. A popular idea is that a child will receive a portion of the money in trust at age 18, another share at age 21 and the balance at age 25. Later ages can be chosen if the parents want that.

The clients I met today liked the idea of giving their children half of their inheritance immediately upon the parents' death and the other half five years later. Some parents like the idea of spreading the trust equally over ten years with an annual payment.

When this kind of trust is set up, the lawyer will ask the parents whether the trust should allow encroachments. Encroaching on a trust means taking some money out to be paid to the child or on behalf of the child on an as-needed basis. In other words, if money is needed for medical treatment or university fees etc, the trustee of the trust can decide to allow the payment even though it would be over and above the scheduled payments from the trust.

When you see a lawyer to give instructions for a Will, you do not need to have all of this figured out before you go. You should choose a lawyer with a specialty in Wills and Estates so that you can ask for ideas and discuss the various plans before deciding. You know you're working with an experienced, creative Wills lawyer if you find yourself thinking "I hadn't thought of that" at least once during your meeting!