Gifting large amounts of money and other assets to children and grandchildren can be a very good financial strategy for many wealthy Canadians living a cross-border lifestyle. Gifting assets while alive offers many benefits including reducing the size of a potential estate subject to taxation both through the U.S. estate tax laws and Canadian deemed disposition rules. On top of this, and more important for many people, is having the opportunity to watch and experience the enjoyment those gifts provide to family members. Bringing your grandchildren to South Florida in the dead of winter for a week…priceless!
An article in today’s The Globe and Mail does a wonderful job describing many of the benefits of gifting parts of an inheritance now:
Beware there are also significant risks to undertaking a gifting plan of big size, particularly when considering doing so as a snowbird or someone living a cross-border lifestyle. The biggest risk is giving away money and assets that you ultimately may need. Gifting assets to avoid potential taxation without regard for potential expenses you may incur in the future, such as major long-term care expensive late in life, is simply not prudent financial planning. However, with good financial planning, much of this risk can be eliminated.
Gifting to U.S. non-citizens can be particularly perilous, even between spouses. The general gift rules for U.S. citizens allow for unlimited gifting between spouses and annual gifts of up to $13,000, per person (other than a spouse), per year without incurring gift tax. However, gifting to a non-citizen spouse becomes much more restrictive. Transfers to non-citizen spouses are limited to $139,000 annually (2012 and adjusted for inflation). Gifts above these amounts require that a gift tax return be filed.
The gift tax and estate tax systems are integrated in the US. In 2012, each resident or citizen of the US is allowed to gift or exclude from estate tax, $5,120,000. Note that his amount is schedule to drop to about $1,300,000 in 2013 and beyond unless congress changes the law. So if you were to gift in excess of the $13,000, or $139,000 tax free limits, you will have to use up part of your exemption. So for example, if you were to gift $20,000 to a one of your children in 2012, you would have to file a gift tax return and reduce your exemption from $5,120,000 to $5,113,000.
With well-thought out decisions and good planning, these risks become very manageable, however. Among our clients, spending time with extended family often ranks very high in priorities. Sharing activities and experiences can create lifelong memories. With the financial ability to do so, making these activities and experiences happen through gifts of assets can be a great estate planning tool!