Family disputes often arise from gifts or loans that parents grant to their children during their lifetime. And they get even worse when it comes to sharing the inheritance.
The motivations that drive you to help your children are legitimate: they don’t have the money to pay for college or buy a house, they get sick, are disabled, struggle with drug addiction or gambling problems… Sometimes are these realities those of your grandchildren.
The problem, according to many financial advisors, is that parents make a mistake when they want to help or simply pamper their children. Very bad.
Many people take financial risks that impact their lifestyle in retirement, including becoming financially dependent on their children because they have wasted too much of their savings.
Others donate large sums during their lifetime and fail to deduct them from the beneficiaries’ inheritance. We can imagine that there will be arguments…
Before lending or donating a large amount, you must obtain a financial forecast and tax opinion from a financial advisor, accountant or tax specialist.
Many parents are torn between being helpful and signing papers or hiring specialists. You’re not helping anyone (not you, not your child, not your family) if you simply pass money along without a written record.
You have to adopt the attitude of a banker.
How do you ?
If it is a loan over $2,000, require the beneficiary to sign an acknowledgment of debt or promissory note. This document must list the capital, interest and a precise repayment schedule as well as collateral (seizable assets) in the event of non-repayment.
To avoid disputes, specify in your will that the gift or unpaid balance of a loan will be deducted from the beneficiary’s share of the inheritance. Keep proof of reimbursement (deposits, receipts). When the loan is repaid, you will sign a release.
Advice
• Hold a family council to clarify your intentions. The discussion will perhaps make it possible to find original solutions that will satisfy everyone. Invite your financial advisor who will act as a neutral expert.
• Gifts to children of less than $75,000 are not taxable to either the donor or the recipient. However, the disposal of assets results in a taxable capital gain, including the gift of non-cash assets, such as a cottage or land. Large donations to underage children are particularly monitored by the tax office.
• A donation is irrevocable: the child can use it as they wish. A notarial gift is not possible under certain circumstances, especially if the beneficiary has financial problems or is going through a divorce.
• A promissory note loan expires three years after the last principal or interest payment. Renew it in writing, otherwise you will lose your money.
• Interest on a large loan could be taxable. In certain circumstances, a tax advisor might, for the sake of fairness, divide the tax burden between you and the beneficiary. However, an interest-only mortgage has no tax implications.
• If you take out a loan for your child, you are jointly and severally liable, which poses a risk to your personal finances and assets.
• You can request that the gift or loan you made to your child be excluded from participation in the event of failure by a clause in the marriage or cohabitation agreement, a copy of which you keep.