Giving while living enables people to see how the money helps their children and grandchildren today.Getty Images
Baby boomers are set to leave more than $1-trillion to their heirs in the coming years, representing the biggest wealth transfer between generations in Canadian history.
Those who intend to pass on 100 per cent of their wealth to their children upon death anticipate their estate will average about $960,000, according to an Ipsos survey conducted last year. It’s a sum that could go a long way in helping the next generation today, prompting more Canadians to ask, “Why wait?”
A big motivation for giving while living is the ability to see how the money being used to help loved ones, says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth in Toronto. “We’re seeing this a lot now.”
Clients are using such gifts to help children buy housing, pay down debt, save for their future or pursue other dreams.
“Many people plan to leave their wealth via some type of inheritance but are realizing that their kids are struggling currently. They’re saying, ‘Look, we can help,’” Mr. Golombek says.
He adds that a main objective has been helping with the purchase of a primary residence.
“It’s almost impossible, depending on the market, for the average Canadian to afford a down payment for a first home without some type of financial assistance,” Mr. Golombek says. “In cities such as Toronto and Vancouver, we’ve seen skyrocketing prices for even basic entry-level condos or single-family homes. So, in many cases, parents are talking about making that gift now if they’re able to financially.”
Funding financial foundations
For clients considering gifting a substantial amount of money, advisors can establish two guardrails, says Rica Guenther, an investment advisor with Spiring Wealth Management at Wellington-Altus Private Wealth Inc. in Winnipeg.
She talks to clients about how much they can afford to give, and what exactly that sum will provide to help others strengthen their financial foundations. “It starts with a quantitative and qualitative analysis.”
She says ensuring a client’s own financial needs will be met over their retirement years is paramount. “It then becomes a matter of trying to have those deeper conversations, to get to the heart of what they want that money to achieve.”
Ms. Guenther recently helped a client who owned a successful business channel financial assets into registered accounts (RRSPs, TFSAs and the tax-free first home savings account) for their children and grandchildren, setting up a plan to fund those vehicles fully on an annual basis.
“We knew with certainty there was going to be a substantial amount of taxable assets left at death, and they would not encounter any longevity risk,” Ms. Guenther says. “So, we created a cash flow strategy to build that into their plan.”
Gifting money today can create a lower tax burden for an estate upon death and be part of a client’s overall tax planning.
Advisors can help with those strategies. For example, funding insurance policies is another method of passing wealth along to beneficiaries while they’re still alive. Unlike most other investments, insurance proceeds are tax-exempt.
“Setting up insurance policies for young children, when it’s extremely cost-effective, helps get that foundation established,” Ms. Guenther says. “It’s setting up that generation for success, but it’s also a tax-minimization strategy to reposition [taxable] non-registered assets in more tax-efficient solutions.”
Mr. Golombek says a high-earning client who has maxed out their registered accounts and now has excess savings has a choice. They could allow that money to accumulate in taxable accounts, or gift it now.
Be aware of risks
Gifting large sums of money requires careful consideration of the risks, including loss of control over the proceeds. That’s another key topic to raise with clients. Mr. Golombek points to the risk of divorce, in which an ex-spouse ends up with a substantial portion of the gift despite the family’s intentions.
Family dynamics is another serious consideration, Ms. Guenther says. In the case of a family cottage in which multiple children are set to inherit the property, what happens if some children have no interest in owning it? Should they still get some portion of equity? How is the property treated after they’ve received proceeds while others haven’t?
“These questions highlight the importance of having clear conversations with the beneficiaries, establishing intent and then not creating an estate that’s inadvertently disproportionate,” Ms. Guenther says. “We want siblings to be talking to one another after the estate is settled. That should be the goal.”
Longevity risk is perhaps the biggest one; will gifting a substantial amount away while living imperil the giver’s long-term security?
“The biggest drawback is you risk running out of retirement income. Do you have enough to live on, and some extra in case something goes wrong?” Mr. Golombek says. “That’s where financial advice and planning come in.”
A financial plan with a life expectancy of 95 years of age is suitable in most cases, he says. But advisors and their clients need to revisit that plan often.
“It’s wonderful to start thinking about a living legacy. But it’s imperative to project and update your financial plan regularly to ensure you’re not going to outlive your money,” Ms. Guenther says.