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Passing on your inheritance before you die is as much about how ready you are to give it up, as it is about how ready your next-of-kin is to receive it, experts say. And while taxes or other logistical factors may seem like a priority when it comes to finding the best approach, the simple act of communicating can be the most valuable step.
Cash gifts made to a child can be a joyful way for parents to see the positive impact their money can have on the next generation while they’re still alive. It can also be a more useful way to pass on wealth, by doling it out in smaller increments during the recipient’s life rather than leaving it as a lump sum in a will.
But without some frank discussions between the gift-giver, the recipient and a financial planner, experts warn the disadvantages can quickly outweigh the benefits for the older generation.
The passing on of inheritances from baby boomers to younger generations, including Gen X, millennials and Gen Z, is part of what has been called the “great wealth transfer.” According to CPA Canada, the umbrella organization for accountants, it’s expected to be the largest generational transfer in Canadian history, with $1-trillion of wealth passing between hands from now until 2026.
Financial planner Natasha Knox said people should ask themselves two key questions: Do they want to pass this asset on now? If yes, can they afford it?
“I know it sounds very basic and like I’m being cheeky, but really, at the end of the day, people need to consider what it is they’re trying to accomplish,” she said.
If their goal is to help the next generation during various major life events, such as the purchase of a home or having children, then cash gifts can be more useful given earlier rather than if they were received later on in life.
However, part of that decision is dependent on the size of the wealth that’s available to transfer, Ms. Knox said.
Before giving anything away, sitting down with a financial planner is key to assess just how much breathing room there is to make cash gifts, she said. Otherwise, the older generation could put themselves in a precarious position in which they outlive their resources, while that cash given away as an early inheritance has already been spent.
This assessment should include considering contingencies like the quality of end-of-life or long-term care someone may wish to receive, Ms. Knox said, which could become limited if too large of a chunk of their assets have been gifted.
Julia Chung, chief executive officer of Spring Planning, said once someone has established that they’re in a good spot to make a cash gift, the next step is to determine whether the intended recipient is actually ready to receive it.
For example, Ms. Chung said she has worked with families before where the parents are eager to buy their children a house, but the kids don’t actually want to become homeowners yet.
“Gen Z and Gen Alpha, they’re doing things a lot later and that’s really confusing for their parents who are like, ‘But I want to give you this now, I’m ready for you to do this now and I’m ready for this gift to be done so I can stop thinking about it,’” she said.
It’s also important to ensure any obligations or strings attached are clearly laid out and agreed to before the wealth is transferred, Ms. Knox added, to save any strife down the road.
These could include expectations around how the gifts are used or what amount of emotional attention might accompany the transfer of wealth.
“Sometimes parents will do a lot for their children, and then the children get busy with their own lives and that parent is then hurt in ways that they have trouble expressing,” she said.
Family dynamics can also get in the way if parents plan to distribute their wealth equally to children of varying ages, Ms. Chung said. Due to inflation, the same dollar amount won’t go as far for the youngest kid as it does for the oldest if the money is not given out until they reach a certain age, which could cause tension.
That’s why communication is so important, Ms. Chung said, and why there are professionals who can help with these very specific discussions. Consider bringing in a professional family facilitator or adviser with expertise in this field, she said.
Other factors to be aware of include family law in the province or territory where the gift is being made, Ms. Knox said. If the cash gift is used to purchase a large asset, such as a family home, the laws can affect whether that asset ends up with the child who originally received the money in the event of a separation.
Taxes also vary from province to province and depend largely on the asset they’re being applied to. And while they do matter, Ms. Knox said taxes aren’t something she would base these decisions on.
“The decision on giving while alive or not needs to be based on other factors before delving into ‘Okay, how do we optimize around taxes,’” she said.
