A common element of estate planning is detailing how and when a parent gifts real property to their child. When a parent wishes to gift their child real property there are various legal and tax avenues a parent may take to accomplish this goal. Each avenue comes with its own benefits and drawbacks, so it is essential to consider all factors and select the option best suited for the parent’s circumstances and overall family dynamic. These avenues include:
- Gifting real property under the parent’s Last Will and Testament;
- Adding the adult child to legal title;
- Preparing a Deed of Gift; and
- Establishing an inter vivos trust.
Any dealings with real property may have significant legal and tax consequences, so it is highly recommended to receive the appropriate advice from professionals before moving forward.
A. Gifting Real Property under the Parent’s Last Will and Testament
The first, most well-known option for a parent to gift real property to a child is through their Last Will and Testament (the “Last Will”). A parent can make an express gift of the property to their child as a beneficiary under the Last Will. The Executor of the Last Will would then make the required arrangements to have the real property transferred into the name of the child after the parent passes on.
There are two major considerations to think about when making a gift of real property under a Last Will:
- Legal Ability to Transfer: The parent must have the ability to gift the property to the child, meaning they must have the legal ability to do so. If the parent is registered on title as a ‘joint tenant’ with another individual, on the death of the parent, the property will automatically be transferred to the surviving joint tenant (this is called the “right of survivorship”). So if the parent is a joint tenant, but they try to gift their property to a child under their Last Will, the gift in the Last Will will fail and the child will not receive any share in ownership of the property.
- Responsibility for Tax: The responsibility of who will pay the property transfer tax – the child or the Estate? This will be governed by what the Last Will says. If a parent chooses this option, they should include a provision in the will indicating who will be responsible for the tax. The parent has the flexibility to decide either or. Regardless of what the parent decides, the child may be eligible for an exemption to the B.C. property transfer tax, but this depends on an array of factors that would need to be analyzed for the specific piece of real property
B. Adding the Adult Child to Legal Title
A parent may wish to deal with the transfer of real property while they are still alive, and one way of doing so is to add the child to legal title to the property as a registered, legal owner. Most commonly, the parent and child are registered as joint tenants to the property, meaning that they all have an equal ownership share in the property, regardless of whether the child has made any financial contributions to the property. As mentioned above, joint tenancy also grants a right of survivorship– when one joint tenant dies, the property is automatically transferred into the remaining joint tenant’s names.
One benefit to this option is that since the property is automatically transferred to the surviving joint tenant when the parent dies, the property passes outside of the parent’s estate. This means the value of the property is excluded from the overall value of the parent’s estate, and as such, the value of the property is excluded when calculating probate fees (in B.C., probate fees are payable to the provincial government and calculated at roughly 1.4% of the gross value of the estate less secured debts). However, as this would be a transfer during the lifetime of the parent and child, it would be seen as a deemed disposition from a tax perspective and capital gains may be payable. Furthermore, complications can quickly arise when a joint-tenant child gets married or enters a common-law relationship, or becomes subject to any type of debt recovery (i.e. foreclosure). Since the child is now a registered, legal owner of the property, the child’s spouse is legally entitled to that child’s proportionate share of the real property if they were to separate. A creditor may also pursue the child’s one-half of the property for debt repayment which may ultimately impact the parent’s enjoyment of the home. It is highly recommended to consult with your legal and tax professional before completing this type of transfer, or any type of transfer dealing with real property, to ensure all parties are aware of the consequences of such a transfer.
C. Preparing a Deed of Gift
Another option available to a parent wishing to gift real property to their child while the parent is still alive is to execute a Deed of Gift. A Deed of Gift is a legal document that allows a property owner to gift legal and beneficial ownership of the property to an adult child without any monetary consideration, or “in consideration of love and affection”. This can be done through a lawyer, and the required documents are filed at the Land Title Office. Take note that this process removes the parent from legal title completely, which may not align with the parent’s circumstances while they are still alive.
This option has the potential for significant tax consequences relating to B.C. property transfer tax and capital gains. A thorough review of these tax consequences would need to be analyzed with an accountant before moving forward.
D. Establishing an Inter Vivos Trust
The final, common option for transferring real property from a parent to a child is through an inter vivos trust, commonly referred to as a family trust or an alter ego trust. The parent would need to create an inter vivos trust with the assistance of their lawyer, name the child as a beneficiary of the trust, transfer the real property into the trust, then have the trustee of the trust distribute the property in accordance with the terms of the trust upon the parent’s death.
This option requires a more hands-on approach to ensure the trust’s paperwork is updated and current, and its filing obligations with the Canada Revenue Agency are completed. Like the other options, the various tax implications of establishing a trust would also need to be discussed to determine whether gifting real property under an inter vivos trust would be the best option for a parent.
If you are considering gifting your child a piece of real property, or would like to learn more about how best to accomplish your goals, please do not hesitate to contact Brett Maerz, an associate with Lindsay Kenney’s Estate Planning Practice Group.
The previous articles in this series can be found below:
Associate | Estate Planning and Litigation
This article is intended to be an overview of the law and is for informational purposes only. Readers are cautioned that this article does not constitute legal or professional advice and should not be relied on as such. Rather, readers should obtain specific legal advice in relation to the issues they are facing.