One of the biggest 21st-century paradigm shifts in personal finance could be the growing extent to which parents are financially supporting their adult children.
Parents helping with the costs of weddings or home down payments has always been a thing, but today, the scope is much greater. The parenting playbook pretty much dictates that you will be a major source of funding for your kids long after graduation.
Parents with children over the age of 18 are already onside. In a new poll from Canadian Imperial Bank of Commerce, 76 per cent of them said they would help their kids move out, get married or move in with a partner. The average gift would be about $24,000 overall, and $40,558 for households with income of $100,000 and up.
Almost half of parents in the poll who would provide financial support said they would give their adult children money, 28 per cent said they would let an adult child and his or her partner live in the parent's home to help them save money to buy a house, and 25 per cent said they would act as a guarantor to help get approval for a mortgage. The poll was conducted in June and included 1,236 parents of children 18 or older.
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One factor in this growing acceptance of parental help in all forms may be the influence of new Canadians. Many of them come from cultures where it's normal for adult kids to live with parents and be supported by them to some extent until marriage.
Another factor is the hands-on baby boomer parenting style. Boomer parents try to buffer their kids through life, and money is a very effective tool for doing so.
But the trend of parents giving their adult children money is mostly a reflection of our economy, notably the expensive housing market. "I would certainly say that in high-priced housing markets – Toronto and Vancouver – there's absolutely no doubt that most parents who can afford to are helping kids out with buying a home," said Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management. "Their kids may not have enough of a down payment to do this themselves."
A tough job market for young adults also plays a part. Young adults frequently work contract or part-time jobs that don't provide a steady income or benefits. Mr. Golombek said the normalization of parental help for adult kids may also reflect a need to help young people become more financially literate.
The CIBC poll found that about two-thirds of parents would rather give money than have their adult child and a spouse or partner live with them. If you are going to give money, here are a few guidelines:
- Cash is the cleanest way: Mr. Golombek said there are zero tax implications for you or your adult children if you give a gift of cash.
- Don’t go into debt or dip into retirement savings: A little over one-third of parents in the CIBC survey said they would be comfortable going into debt to help their adult children; Mr. Golombek suggests that gifts should be “never money,” which means money you’ll never spend in your lifetime.
- Consider the emotional aspect: Watch your kids enjoy money you might otherwise leave for them in your will; Mr. Golombek noted that giving your kids money while you’re alive may enable you to avoid probate fees (also known as estate administration taxes) of up to 1.7 per cent in some provinces.
- No strings attached: 60 per cent of parents in the CIBC poll said it was none of their business what their kids did with a gift of money.
CIBC's economics department has estimated in the past that baby boomers will inherit $750-billion over the next decade from their own parents. The bank's poll on financial gifts suggests this money will play a role in the help boomers offer to their kids.
Almost three-quarters of the parents in the poll who were 55 or older said they would hand all or part of their inheritance to their adult children. We know how comfort-loving and indebted boomers are. Their willingness to pass along an inheritance to their adult children speaks volumes about the financial needs of the younger generation.