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How to leave money to your grandkids

How old they are can make a difference

If your grandchildren are over the age of majority and are responsible enough to receive an inheritance directly, they can be named as beneficiaries on a registered plan or of an insurance policy, or as beneficiaries in your will. (The best life insurance in Canada: your complete guide.)

If they are under the age of 18 or there are reasons that they should not receive their inheritance directly like a disability, substance abuse problems, or other concerns, their inheritance can be held in trust.

You can name a trustee in your will to hold assets in trust for your beneficiaries. An ideal trustee for a grandchild’s trust may be their parents and if you have grandchildren from multiple families, you could name different trustees for the different trusts. 

A trust may have a limited duration, like until the beneficiary attains a certain age or for a certain number of years after your death. Some trusts may last for the lifetime of the beneficiary, like a Henson trust for a disabled beneficiary. A Henson trust is meant to ensure funds are available to provide for the beneficiary but help them to qualify for government support that may be lost due to asset or income thresholds. (What’s the difference between a will and a trust?)

What is a qualified disability trust?

Qualified disability trusts arising on the death of an individual and for a disabled beneficiary also benefit from special tax treatment. The income of the trust is taxed at graduated marginal tax rates, like an individual taxpayer, enabling income splitting between the trust and the beneficiary. This differs from other testamentary trusts which are taxed at the top marginal tax rate. (How to open a registered disability savings plan—aka RDSP.)

If your child or grandchild is disabled, your RRSP/RRIF can be transferred to their RRSP/RRIF or RDSP to defer tax for many years with no tax payable on death and future tax payable on their withdrawals.

The assets can you leave for grandkids: Money, savings and more

If you name a grandchild as the beneficiary of a specific asset, you should be mindful of the tax consequences. Some assets, like a memento or a car, may have no tax payable, though could be subject to provincial or territorial probate or estate administration tax. Others, like a cottage or a registered retirement savings plan (RRSP) and/or a registered retirement income fund (RRIF), may have tax payable. The tax is owed by the estate of the deceased, so consider the reduction in the rest of your estate’s value if you leave a specific asset to a grandchild. 

A tax-free savings account (TFSA), RRSP, RRIF or another similar registered account can have a grandchild named as beneficiary. If they are named as beneficiary, the account passes outside of your estate and directly to a grandchild. Likewise with an insurance policy. 

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