Risks associated with advancing an inheritance early

Posted on May 1, 2023 in Wills & Estate Planning by Kimberly D. Visram

It is not uncommon for farming families to gift land or assets to the next generation with the intention that such gift is an advance on one’s inheritance. There are many benefits of “giving sooner”, including:

  1. Potential to save on taxes and/or probate fees;

  2. Benefiting the next generation with their own farming operations;

  3. Reducing your asset base to lessen or eliminate the burden and costs associated with ongoing management of assets;

  4. Emotional or psychological benefits in that it allows the giver the emotional reward of seeing their loved ones enjoy the benefits of the gift;

  5. Increases or provides privacy in that probate or court assistance may not be required on death;

  6. Reduces the potential for estate litigation or conflict over gifts set out in a Will.

While providing an advance on someone’s inheritance may seem like a good idea at the time, doing so comes with some significant risks that should be considered before any such transfer takes place.

Advances cannot be easily undone

If property is transferred or placed in the name of a child (or other individual) with the intention that it is a gift or advancement on their inheritance it can be vital to distinguish whether the intention is for the gift to pass at the time of transfer, or is the original owner retaining some form of ownership until their death? If the transfer is truly a gift, like any other gift, generally once the gift is given, you lose control over the asset and you cannot get it back.

By way of example, if a farmer decides to issue shares in a farming corporation to a child during the farmer’s lifetime, the child now has rights that attach to those shares. Without a clear shareholder’s agreement that permits the farmer to do so, legal action could arise if the farmer later decides the child’s shares should be redeemed or the child should be removed from the company. Furthermore, doing so could trigger the requirement for the farmer to repurchase the once gifted shares at the current fair market value.

Gifts of land can be similarly problematic. Saskatchewan operates under the “Torrens” system of land registration. Under this system there is no way to distinguish on the title itself between registered ownership and beneficial ownership. The transfer of property from one individual to another cannot be unilaterally reversed. So, if a farmer transfers his or her property into his or her child’s name, and later changes his or her mind, without the child’s cooperation it will be near impossible to have the transfer reversed.

It is also important to remember that once the gift is given you lose control over how it is used. If you later become dissatisfied with the recipient’s management of the gift, or intention to perhaps sell the assets, you have no option to rescind the gift or force the recipient to manage the gift as you desire. Similarly, while estate planning (i.e. your Will) can be unilaterally changed throughout your lifetime (provided you have mental capacity), once a gift is given you lose the ability to perform future planning with that asset as part of your overall estate plan.

Advances on Inheritance should be clearly documented

If you decide to give a gift of money to your child now, as opposed to waiting until you pass away, consider whether it is necessary to document this fact.  For example, if in your Will you stated that you wanted each of your children to receive $100,000, but prior to your death, you decided to give $50,000 to one of your children to assist with a big purchase, the following question arises:  Was the $50,000 intended to be in addition to the $100,000 that you were otherwise planning to gift on death?  Or, is the amount that the particular child will receive on death now reduced by the $50,000 you already paid?   It is important to be clear when you are making an advance on an inheritance to avoid confusion on your death.

Once the advance is made the property belongs to the recipient

Once property is transferred, it belongs to the recipient. This means that the gift now becomes open to seizure by creditors of the recipient or could be found to be “family property” that is subject to a division in a separation or divorce.

In Saskatchewan, gifts and inheritances are family property subject to division. If an individual receives a gift and then they separate from their spouse, the value of that gift is considered when dividing family property.

If advancements are being made on an inheritance (or just generally as part of your overall estate plan) it may be prudent to discuss with the intended recipient whether an agreement with their spouse should be put into place that exempts the gift (or future inheritance) from division if a separation or divorce occurs. Such agreements can be narrow in the sense that they only address gifts or inheritances and typically they are reciprocal in that each spouse would retain any gifts or inheritances they receive without the fear of a claim by the other spouse if a separation or divorce occurs.

Kimberly D. Visram
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: kvisram@shtb-law.com
Facebook: https://www.facebook.com/KimberlyVisramLegal/

This article is provided for general informational purposes only and does not constitute legal or other professional advice.

This article was originally published in The Western Producer on September 15, 2022.