Leaving an early inheritance allows parents to see how the next generation enjoys the funds, but that can be a mixed blessing.SurfUpVector/iStockPhoto / Getty Images
The idea of transferring wealth to the next generation early has gained traction among Canadians, whether to support a large purchase or to see children and grandchildren enjoy the funds. But giving while living can be complex.
For advisors, guiding clients through the process can ensure giving is tax-efficient and makes sense for all family members.
According to an Edward Jones Canada survey conducted late last year, half of Canadians expressed a desire to leave part of their inheritance before they die, with 57 per cent of those intending to help loved ones with home ownership.
“The real reward of building wealth is seeing it make a difference for your kids while you’re still able to see that impact,” says Elke Rubach, president of Rubach Wealth in Toronto. “But a generous intention requires a very thoughtful plan, because once the money’s gone, it’s gone.”
Here are four elements to consider when giving while living:
1. Giving shouldn’t be impulsive
Some clients make commitments to give adult children money before taking time to understand if it fits with their own retirement plans, says Joe Curry, financial planner and president of Matthews + Associates in Peterborough, Ont.
“That’s a big part of why we want to see our clients on a fairly regular basis, so that we’re having those conversations,” he says.
Just because parents can write the cheque today, Ms. Rubach says, doesn’t mean they can afford the gift. They may have money tied up in their business or properties that have fluctuating values.
“It has to be an ongoing conversation between the parents, the advisor and the family,” she says. “The givers need to know their number: How much do you actually need to comfortably live through hell and high water and never become dependent on anyone?”
Adam Chapman, certified financial planner at YES Money in London, Ont., doesn’t discuss giving while living until a few years into the relationship with clients, so he has time to observe how they manage their money, communicate and react through a down market.
“Those things are good mental assessments for the advisor to have before they even consider one of these conversations,” he says.
This preparation can also be helpful for adult children receiving money. Knowing the gift has been planned over several years can reassure them if they’re worried their parents haven’t saved enough, Mr. Chapman says.
2. Learn to let go
Aside from affordability, the most important conversation Mr. Chapman has with clients is preparing them to let go after a gift.
“Living gifts are far harder than inheritance because you’re here to see the benefits but also what might go wrong,” Mr. Chapman says.
Advisors can discuss clients’ expectations for the gift while helping them give it without excessive parameters.
“Once it’s not yours, it’s not yours,” he says.
3. Fair isn’t always equal
Many times, clients giving large sums want to ensure each child receives an equal amount, but that isn’t always what happens.
“We tell everybody: fair isn’t always equal, just depending on the circumstances,” Mr. Curry says.
When gifts aren’t equal, communication is vital to make sure the purpose is clear, he adds.
In one example, clients gave a large amount and extended a loan to one child for a down payment on a home after a divorce. The parents had no plans to equalize the gift with their other children. The loan was included in the will.
The clients held a family meeting to ensure everyone understood the intent of the gift and confirm the parents would help the other children financially if they were in a similar situation.
Ms. Rubach also recommends documenting everything so everyone understands what’s a loan, what’s a gift, what’s an advance inheritance and what would happen if things change.
4. The big picture strategy
Clients often have ideas for giving money. It’s the advisor’s job to take the discussion back a level, Mr. Curry says, to find out what they’re trying to achieve and the most efficient way to carry it out.
For example, giving cash, transferring investments and moving an asset out of a corporation have different tax consequences, Ms. Rubach says.
What the money is used for – whether a matrimonial home or financing a business – may require additional planning.
“Let’s understand this before we proceed. That might mean changing the amounts, staging the transfer [or] choosing different structures for different kids,” she says.
“The ultimate recommendation has to earn its place in that family’s plan. So, seeing the whole picture – not just, ‘I want to give money.’”