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tax matters

While you may be thinking about last minute gifts for your family and friends, it might be worthwhile thinking about your estate planning at the same time. It's no secret that you can't take it with you, so you're eventually going to give away your assets anyway. Why not consider giving away some of your assets as gifts this time of year?

Now, I'm thinking of financial assets here, but anything of growing value will do the trick. A good friend of mine is going to give his kids a few of his collections this year. I'm not sure what value there is in a collection of Pez dispensers, ticket stubs, bobble-head dolls, and garden gnomes, but I'll give him the benefit of the doubt. You see, there are some real advantages of making gifts today:


1. Gifts reduce taxes on death

If you're a resident in Canada you'll be deemed to have sold the assets you own at the time of death. If these assets have appreciated in value then a tax liability can arise on the gain in value. The less you own at the time of death, the less tax you'll pay, making gifts of assets today a good strategy to reduce that eventual tax liability.


2. Gifts reduce probate fees on death

Probate is the process whereby your will is validated by the province after your death, and there are fees levied for this. In provinces other than Alberta and Quebec (where the fees are flat, and nominal), probate fees are generally a percentage of your estate assets and increase as your estate increases. Reducing the level of assets that you own at the time of death by making gifts today can reduce these fees.


3. Gifts allow the use of capital losses

If you give your children, or anybody other than a spouse, assets that have dropped in value, the capital loss can be used to offset capital gains realized this year, in the past three years, or going forward.


4. Gifts can provide asset protection

If you're a business owner, professional, or otherwise have concerns about exposure to creditors, you may be able to protect certain assets by giving them to family members today.

Be aware that if you make that gift in or around the time you are facing attack by creditors the assets may still be exposed due to "fraudulent conveyances" legislation where you live. Speak to a lawyer about it.


5. Gifts can use up U.S. exemption amounts

If you're a U.S. citizen, resident, or green card holder, you could be subject to U.S. estate and gift taxes. Currently, there is an exemption for the first $5-million of assets you transfer during your lifetime or on death. This exemption amount is expected to be reduced effective Jan. 1, 2013 (the new amount has not been announced yet), and so making gifts on or before Dec. 31, 2012, can enable you to use up that exemption before it may become unavailable in the new year.


6. Gifts can help your loved ones who need it

Some parents and grandparents have a desire to help their children or grandchildren with the costs of education, or buying a first home, for example. Gifts of assets today can help with these objectives.


7. Gifts during your lifetime allow you to see the impact

Many individuals like to see the positive impact that their inheritance is having on the next generation. Giving assets away at the time of death won't allow for this, but giving assets away today can be satisfying as you see the difference you can make.


8. Gifts can still provide control and use

Certain assets – a cottage, for example – may still allow you some control over and use of the asset through an agreement with your heirs. A family trust can also play a role in maintaining control and use of an asset.


If you're going to play Santa rather than Scrooge this year, be aware that making gifts can have some drawbacks, so take these into consideration first:

  • Giving assets to someone other than your spouse will deem you to have sold those assets at fair market value, which could trigger a tax hit at the time of the gift.
  • Making an outright gift can cause you to give up control over or use of the assets.
  • Make sure you don’t give away assets that you will need to ensure your financial independence.