Give with Your Heart …and a Few Conditions

lorisa stein give your hear and a few conditionsThis article was published in Morgan Meighen & Associates inFocus Timely Investment Insight Spring 2012 Edition

Given today’s uncertain economic times, parents may decide to financially assist their children now rather than traditionally providing a bequest contained in their will. They may purchase a starter home for their child; transfer a select class of shares from the family corporation; outright transfer significant assets; or set up an express trust. Other parents may choose to designate the child as the sole beneficiary of life insurance proceeds.   

However, given today’s uncertain social times, parents are cognizant that a relationship or marriage may fail. If this were to occur, they are concerned that the partner of their adult child may inadvertently share in the transferred assets. There are legal means available that may alleviate these concerns.

Providing a substantial gift of property with conditions means the gift doesn’t vest until all the conditions have been fully satisfied. The delay investing ownership creates a stop-gap period over which the donor of the gift can decide to accelerate, delay further, or cancel the transfer. These safeguards can be as simple as delaying the vesting until the child has reached a particular milestone in the marriage, such as a tenth anniversary, and the requisite signing of a domestic contract which excludes the sharing the ownership or the value of the gifted asset.

The planning of how to structure the gift to ensure that it remains in the child’s hand and is not shared with a partner or spouse is critical. The best plans are ones that include the involvement of the company’s corporate counsel, trust and tax lawyers, and financial and economic specialists. Consideration must be given to the location of the asset to be able to enforce the gift if ownership is challenged.   

The circumstances surrounding the transfer of the asset to a child should be set in writing showing the detailed planning, the value of the asset, and the reasons for the gift including the intent that it be held exclusively by the child. When memories start to fade, busy schedules overwhelm, and life’s twists and turns lead parents to forget the details, the written text confirms the facts of the day. This written record will include the instructions to the real estate agent, or to the trust’s lawyer, a clear statement of intention why the asset is being directed to one child over another, and to the exclusion of the current or future spouse.

After the transfer has taken place and/or the will executed, and in fulfillment of at least one condition of the gift, the child enters into a domestic contract with his or her partner or spouse. A domestic contract is the umbrella term for a cohabitation agreement, prenuptial agreement, or marriage contract. These contracts typically become separation agreements upon the breakdown of the relationship or marriage. The contract acknowledges the conditional terms of ownership of the gifted asset, its current value, and that its value shall be excluded from being shared with the partner or spouse. If the gift were transferred outright, the risk that due to incomplete financial disclosure, over or undervalues attributed to the asset, poorly drafted waivers or the failure to properly execute a domestic contract may lead to the inadvertent sharing of the asset’s value. Herein lies the value of the conditions attached to the gift: if the conditions are not met, the parent retains ownership of the asset.

Although common-law relationships are not covered by the same statutory property sharing regime established for married couples in Ontario, contribution to the improvement, maintenance, or even household chores and the raising of children could lead to the claim of a constructive trust if that effort relates to the asset, such as the family residence, proffered by a parent to his child. 

Claims may always be asserted by the non-titled spouse to share in the value of the gifted shares, realty, or investments jointly held with a parent, whether they have merit or not. Be secure in the knowledge that the detailed written circumstances dating to the time of the transfer and the executed domestic contract will provide excellent rebuttals. Unfulfilled conditions by the child mean that the asset directly reverts to its original owner, the parent.

Waiver: This article is not intended and does not contain legal advice. Consult a lawyer for legal advice pertaining to your circumstances.