What is Estate Planning?
Estate planning is the process of arranging for the management and transfer of a person’s estate during their life and after their death. The “estate” is the term for everything owned by a person and is usually used to define those assets after they’re gone.
This includes bank accounts, investments, business shares, real estate, and personal property like cars and other possessions.
The process of estate planning may include the preparation or review of legal documents such as wills, trusts, and powers of attorney, as well as the potential designation of beneficiaries where appropriate.
It may also include the projection of how assets will be distributed, including assessing how taxes, debts, and estate administration expenses will be paid, and may require adjusting documents and plans to better suit your family’s needs and wishes.
Estate planning helps ensure that your wishes are carried out and that your loved ones are provided for as efficiently as possible.
Inter Vivos Gifts
While most people envision that this naming of gifts and inheritors would happen through their will after they’re gone (called a testamentary gift), some people might prefer to provide gifts while they’re still alive.
Not only could the recipient potentially benefit from receiving a gift now, but the donor could also experience the joy of gift-giving. Gifting during life may also help the family unit as a whole to pay less tax. The legal term for a gift made while alive is an inter vivos gift (pronounced inter-VY-vos, a Latin phrase meaning “between the living”).
Before making a gift, it is important to consider the tax implications. When you gift a capital asset like a taxable non-registered investment account, a cottage, or a rental property to a non-arm’s length party like a child, it may result in a deemed disposition.
Even though you did not sell the asset to them, it may be as if you sold it. So, an outright gift to a child may cause an immediate tax implication to you.
The Risk of a Failed Gift
Did you know that without proper planning and documentation, an inter vivos gift could “fail”? Without proper documentation, the inter vivos gift could be subject to the presumption of resulting trust when your estate is administered.
Presumption of resulting trust is a legal concept that applies to gifts. This concept assumes that the recipient is simply holding onto the asset (money, property, etc.) for the benefit of the donor, and that it can’t be assumed without proof that the donor meant the asset to be a gift.
The responsibility to prove that it was a gift belongs to the recipient. If the gift is subject to the presumption of resulting trust (which it could be, without sufficient documentation), then that asset may be determined to be part of the donor’s estate, and subject to distribution according to the will.
In the real-life example of the 2007 Supreme Court of Canada case known as Pecore v Pecore:
- A father put money into a joint bank account with his daughter.
- His will specified that his estate was to be left equally to his daughter and her husband.
- By the time the father passed away, the daughter and her husband had divorced. The daughter claimed the entirety of the account as her own, and the husband sued.
- He claimed that the money was held in trust for the father and should be distributed according to the will.
- The court sided with the husband since the daughter had no proof in writing that the money was intended as a gift.
This legal concept can be very beneficial in the case of an unintended and unequal distribution of a deceased person’s estate. However, if you are planning to give an inter vivos gift and want to ensure that the recipient can keep it and that this gift won’t be included in your estate, understanding this concept and taking steps to prevent the gift from failing could be smart.
Holding an asset jointly with a child may not lead to the intended outcome upon your death without other steps.
Smart Planning for Gifts
To be considered a gift, a few conditions need to be met:
- The donor had to intend to make the gift and can’t have received or expected payment, compensation, or a trade in return for the gift.
- The gift needs to be delivered to the recipient.
- The recipient needs to accept to the gift.
This is why holding an asset jointly with a child can be ambiguous. Intention needs to be clear.
It’s important to note that inter vivos gifts are usually irrevocable, so you should be very sure that you won’t change your mind before making one.
It’s also important to note that your intentions with a jointly held asset or gift should be made in writing to avoid ambiguity and saved where it’s accessible by the recipient.
The best way to ensure your gift doesn’t fail, is to seek legal counsel to prepare a deed of gift. A deed of gift isn’t required for proof, but this legal document uses particular language and is unambiguous, which is the strongest defense for a recipient against a challenge by another inheritor.
TL;DR
An inter vivos gift could fail if it is subject to the presumption of resulting trust, which means that the recipient is assumed to hold the asset for the donor unless proven otherwise.
To prevent this, the donor should document their intention to make the gift and meet the legal requirements of a gift. Consider preparing a deed of gift with a lawyer, which uses specific language to confirm that the donor intended to make an inter vivos gift. It is the strongest defense for the recipient against any challenge by another inheritor.
If you have any questions about financial planning, you can always reach out to us.
