How to maximize what you pass on to your kids while avoiding unnecessary taxes and fees.
According to an Angus Reid study from 2024, 83 percent of parents with young children have had to delay financial to-dos like saving for the future this year, but that can come with a major opportunity cost as we aim to maximize what we pass on to our kids in future. I have two young kids who are one and three, and my sole financial focus is their financial well-being—supporting them through life milestones and building generational wealth to pass on to them in the future.
But how do you prioritize planning for the future when costs have gone up today? And how do you transfer assets to your children in the most efficient way?
When you pass away, your will outlines who will act as your executor (the person who wraps up your estate and transfers assets to beneficiaries), the beneficiaries who will receive your assets, and if necessary, the guardians who will care for any minor children or pets. If you don’t have a will, a government formula in each province specifies who will receive your assets, and that likely wouldn’t reflect your wishes.
For example in Ontario, if I passed away tomorrow without a will, my husband would receive half of my assets and the other half would be held by the court for my minor children until they turn 18, which is not what I would want. So the first step to ensuring assets flow efficiently is to have a will that stipulates your wishes, including stipulating the age at which minor children should receive their inheritance so they will be mature enough to spend it wisely.
An estate is the total of everything you own at the time of your death, including real estate, bank accounts, investments, personal possessions, and any other assets. It’s important to understand what falls into your estate, especially since the assets that comprise your estate will likely be subject to probate fees, which can reduce the amount of money your children would receive.
The following would not form part of your estate when you pass away:
Any other assets would form your estate and would flow as per the wishes in your will (or, if you pass away without a will, as per the government formula in your province). There are exceptions for things like spousal rollovers, so if you’re not sure about what would fall into your estate vs. not, you can speak with a financial advisor.
In order to maximize how much your children receive, you can structure assets to avoid falling into your estate and therefore being subject to probate fees. For example, putting named beneficiaries on life insurance policies and registered accounts, owning assets jointly so they pass automatically to the surviving spouse, or creating a secondary will to separate assets that would not be subject to probate fees.
There is no inheritance tax in Canada, meaning that if you receive an inheritance or if you leave one to your kids, the money is tax-free when it goes to them. However, this doesn’t mean taxes aren’t paid on those assets. When you pass away in Canada, your assets are considered to be sold on the date of your death, and your executor is responsible for filing your final tax return and paying any taxes owing from the proceeds of your estate. This could mean that your estate is on the hook for a giant tax bill, which could reduce the size of your children’s inheritances, especially if you own a secondary property like a cottage or have investments that could trigger capital gains taxes. Capital gains taxes increased in June 2024, so it’s never been more expensive to pass on assets with a capital gain.
One of the simplest ways to avoid triggering capital gains taxes is joint ownership of assets. For example, I owned a secondary property in Prince Edward County before my husband and I got married. If I passed away, my estate would have been on the hook for capital gains on that property, which could have forced my husband to sell the property to pay the tax bill.
I added him to the title so we now own the property jointly, and if I pass away, he would just become the sole owner, and capital gains taxes would only be owing upon his passing. It’s also common for parents to co-own property or accounts with an adult child, but it’s important to note that there is risk involved with this depending on how you set it up since the co-owner can borrow against that asset or withdraw assets from accounts. Only pursue this option after you’ve considered those risks.
Another way to offset capital gains is through life insurance policies. I’ve heard of families taking out life insurance policies that would cover the capital gains bill on a family cottage so they aren’t forced to sell the property when the parents pass away. Life insurance is also just an incredible way to provide financial security for your children, especially if you’re younger and you haven’t built up a lot of personal wealth.
The younger and healthier you are, the more inexpensive it is to get a simple term life insurance policy that could provide for your children when you pass away, and this also helps to offset any taxes owed by the estate. I’ve also taken out whole-life policies on my children that give them guaranteed life insurance when they’re older, as a way to set them up for success with their own children.
Another common way to avoid capital gains at the time of your passing is setting up a trust. For example, putting a cottage in a trust with your children as beneficiaries. This can be complex, as it involves legal fees to get the trust set up, and a trustee who will manage the trust and file tax returns. If you’re interested in learning more about this option, you should speak with a tax specialist who can advise on the next steps.
While I’m very focused on growing my net worth so I can pass on as much as possible to my children when I pass away, I also want to support them through key life milestones while I’m alive. After all, the average life expectancy for women in Canada is 84, which means my kids may not get an inheritance until they’re well into middle age. I also want to enjoy seeing the impact of gifts while I’m alive.
There are several ways to provide a living inheritance. The first is savings via an RESP for their education. I have an RESP for both of our daughters, and it’s a no-brainer savings vehicle because the government matches your savings up to $7,200 per child. While I question what higher education will look like in 20 years thanks to trends like AI, it’s safe to assume they will pursue some sort of higher education.
So I plan to max out the government matching and then move on to the next tactic: TFSAs for my kids. Tax-Free Savings Accounts are a great way to save for anything related to your kids, since any earnings are not taxed, even when they are withdrawn. This can be a great way to contribute to a down payment, help them pay for a wedding, or for me personally, achieve my goal of giving them money to travel the world.
Like inheritance tax, there is no gift tax in Canada so your children would receive the money tax-free. It can seem overwhelming to prioritize saving now when there are so many competing day-to-day expenses, but even a small amount contributed monthly can grow exponentially over time thanks to government matching and the power of compound interest.
While you can give your children money for their education or other milestones, you can also give assets like homes, cars or other property while you’re alive. It’s important to note that if you gift any investments or property that would be subject to capital gains—for example, a cottage—that asset would be deemed to have been sold at fair market value on the day you pass it on to your kids, and you would be subject to paying any capital gains taxes on that asset.
These tips can help you think about your net worth holistically, and put things in place to ensure you maximize your children’s inheritances without sacrificing your financial health today.
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Named one of Bay St. Bull’s Women of the Year, Erin Bury is one of Canada’s top entrepreneurs, an active startup advisor. and a former marketer and technology journalist.
Erin is the co-founder and CEO at Willful, an online estate planning platform that makes it easy for Canadians to create a will in less than 20 minutes. Since launching in 2017, Willful has helped people in all 10 provinces to create over 300,000 wills, power of attorney documents, and other estate planning documents. Erin runs the company with her husband Kevin, and they secured a deal for the company on TV’s Dragons’ Den in December 2021.
Erin is also a board member for Save the Children Canada. She lives in Prince Edward County, Ontario with Kevin and her two young daughters.