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Grandparents shouldn't forget selves
Wednesday, February 18, 2004
If there's one mistake many grandparents make when they contribute financially to raising their grandchildren, it's being too generous, say financial experts.
"They have to be careful about giving away too much, even if they have a lot of assets. They could leave themselves vulnerable down the road," says Steve Roth, a tax partner at Zeifman & Co. LLP in Toronto. "The last thing you'd want is to have to go to your grandchildren for money later on."
There aren't any investment vehicles or tax incentives that specifically address the issues facing grandparents contributing to their grandchildren's upbringing, says Scott Gibson, vice-president of E.E.S. Financial Services Ltd. in Markham, Ont. "The Income Tax Act doesn't provide a lot of benefits to the grandparent so you should structure your affairs to take full advantage of the opportunities that do exist."
There are a number of strategies grandparents can follow to care for their grandchildren, without leaving themselves financially strapped, says Jim Sheldon, an adviser with Assante Capital Management Inc. in Mississauga, Ont.
"Some of this, though, can be quite complicated. People need to sit down with their accountant, lawyer and financial adviser together to work out a complete plan," he suggests.
Setting up a joint account for a grandchild, for instance, isn't something that he supports, Mr. Sheldon says. "Grandparents do it to split their income and avoid paying probate fees when they die. If you've only got three months to live, maybe, but if you're a healthy 65-year-old, absolutely not."
The concern is that you have no protection if your grandchild is pursued by creditors and they go after the joint asset, he explains.
Whether you're caring for your grandchildren full-time or helping out with their education, camp or other expenses, here are some suggestions from the financial experts:
Invest in RESPs. Registered education savings plans are a simple, specific way to earmark money for education, says Mr. Sheldon, especially with the additional money kicked in by the federal government. If you put in the maximum $2,000 a year for each child, that means a top-up of $400.
When it comes to the investments, 'I'm very conservative," says Mr. Sheldon. You've already got a 20-per-cent gain, so why risk it? If it's a long-time investment, I'll put it in bonds to get another 5-per-cent return."
Buy whole life insurance in the child's name that can be cashed in to pay for school or other expenses if needed. There are several benefits to this option, Mr. Gibson says. Insurance premiums for young children are low, there isn't the same restriction as an RESP on how the money is spent, and if the child became uninsurable for some reason later on, he or she could still be covered under the policy, he says.
Gift money or other assets such as stocks or real estate to your grandchildren. There is no tax on the gift itself, says Mr. Roth, something that many people don't realize.
But there are a few important things to keep in mind. "If there's a capital gain on the shares you give or the property's gone up in value, you have to pay tax on that at the time, as if you've sold it," Mr. Roth says.
Also, if the child is under 18 and the money is then invested in an income- or dividend-producing account, you, as the contributor, have to pay the tax at your rate.
Much more preferable, says Mr. Roth, is to invest in stocks or other properties producing capital gains, because any income will be taxed in the child's hands, at his or her lower rate.
"We file returns for kids who have stocks but are only six months old. The tax rate is obviously really low," says Mr. Roth. If the child is over 18, all income from the trust is taxed in his or her hands.
Employ your grandchild and pay him or her a salary if you are self-employed. It's a way to income-split, but it has to be reasonable, says Mr. Gibson. "You don't pay a teenager $100,000 to do the filing." Fund the child's registered retirement savings plan once he or she starts to earn an income and create contribution room. "That will give the young person a pool of capital to draw on in a tax-effective way," says Mr. Gibson. Your grandchild could use up to $20,000 of his or her RRSP for a down payment to buy a starter home under the federal Home Buyers' Plan, for example.
Establish a testamentary trust for your young heir through your will when you die. The tax regulations around this kind of trust are very favourable, Mr. Gibson says, with graduated tax rates based on the income it generates.
It's also possible to split the tax burden by dispersing some income from the trust to the beneficiary, meaning that it can be taxed at the child's low rate, says Mr. Gibson.
As well, you can stipulate exactly when and how much money your grandchild receives, says Mr. Sheldon. "It can be a bad thing for children to receive too much, too soon, they can end up doing nothing for themselves. I see it all the time."
Set up an intervivos trust while you are alive, which can be used to produce an income to pay for your grandchildren's expenses. If you transfer some of your assets to the trust, and pay the tax at the time, none will be attributed back to you later on, Mr. Sheldon says.
The downside of this kind of trust, Mr. Gibson adds, is that it's not very tax-effective. The trust is taxed as if it were a person in the top marginal tax bracket, he says, regardless of the income it generates.
Another problem, Mr. Roth says, is that it can be extremely difficult to get back the money if you need it.
"Gifting money as your grandchildren need it, and as you can afford it, might be the better way to go," he suggests.
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