From The Globe and Mail

Passing the buck: Handing money down

TIM CESTNICK

Passing the buck may be a completely inappropriate tactic when it comes to the blame game, but when it comes to your money, passing the buck to your kids is something you're sure to do one day.

But there are questions to answer. When will you transfer your wealth and how will you do it? The answers can be different for everyone. Yet, there are some time-tested do's and don'ts to share.

The do's

Do consider affluenza. In his book True Wealth" Thane Stenner does a good job of discussing the perils of giving enough money to your kids that it robs them of incentive and initiative.

The amount of money can't be defined - it's different for everyone. While most of us want our kids to have every advantage in life, we don't want everything handed to them on a silver platter.

This does not necessarily mean that you should avoid transferring your full estate to your kids but you may want to control the timing of distributions to them. Receiving large amounts all at once could cause affluenza, while trickling the money to the kids over time can help. This brings me to the next idea: trusts.

Do consider a trust. Most of us will give more to our kids at the time of our death than during our lifetime. If you're concerned about giving too much all at once to your kids when you die, consider leaving money to a trust for them.

The trustee can make distributions to your kids over time, at ages you specify. You can even build conditions that must be satisfied in order for your kids to receive the assets from the trust. These are often called incentive or productivity trusts, and I've written about these before (see http://www.timcestnick.com).

During your lifetime, a trust may not be necessary. Simply consider staggering your gifts over time rather than giving large amounts all at once.

Do count the tax cost. When you transfer assets to your kids during your lifetime, or at the time of death, you're deemed to have sold those assets at fair market value. If those assets have appreciated in value, you could trigger a tax hit when making the transfer.

Be sure to count this tax cost first. You'll minimize the tax hit if you give cash or assets that have not appreciated in value much, if at all. At the time of your death, life insurance proceeds will be paid out tax-free, and make a good inheritance for the kids as a result.

Do give an allowance. If your kids are still young, it makes a lot of sense to give them an allowance. It can teach them the value of money and how to manage it.

The amount of the allowance will obviously vary depending on the age of your child. The most important issue here is knowing when allowances should stop. Somewhere between the ages of 19 and 23 is most common.

The don'ts

Don't be a control freak. Sure, parents want their children to make wise decisions with their money. And many parents think they're doing the kids a favour by making decisions for them, or withholding rewards if a child makes a bad financial or lifestyle decision.

This will more often than not lead to resentment. There's a fine line between stripping a child of responsibility and punishing them, and allowing them to make their own financial and lifestyle decisions while still providing guidance.

Don't always treat kids the same. When transferring assets to your kids during your lifetime, or upon death, you may not treat each child the same.

For example, you may own a business in which one child works. In order for the business to survive in the long run, it may be important for that child to own the business one day. It's often a recipe for disaster when you leave a business like this to all the kids equally, when they don't all work in the business.

Real estate is another asset that can become problematic when you transfer ownership to too many people. Being fair to your kids may not mean leaving all of your assets to all of them equally.

Life insurance is a great equalizer in these situations. One child might receive the business or real estate, while the others receive life insurance proceeds.

Don't forget to talk to the kids. I always encourage parents to talk to their kids about their estate planning. Whether you plan to give your kids assets today, or at the time of your death, sharing this fact with them can help the kids in their planning. You don't have to provide the kids with an exact dollar amount but simply telling them that, upon your death, they will receive "a few hundred thousand," or whatever the amount, can be helpful information. It may, for example, mean the difference between sending their own children to an Ivy league school or the university down the street.

Tim Cestnick is the author of The Tax Freedom Zone, Winning the Tax Game 2004, and managing director, national tax services, for AIC Ltd.

tcestnick@aic.com.

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