If you’re planning on leaving your child a large inheritance, you might be doing both them and your money a disservice.
Not only does letting your children struggle financially while they wait for you to die create an uncomfortable family dynamic at holiday dinners, it also robs your wealth of its best application: to make your life and that of your children more comfortable.
Instead of leaving a traditional when-you-die bulk inheritance, consider giving your children cash gifts in early adulthood to set them up financially at the start of their life, and to leave you free to enjoy your money at the end of yours.
Canadians live, on average, 82 years. Which means if you had your children in your 30s, they’ll be nearing their own retirement by the time you kick the bucket. While no one will be unhappy receiving a cash windfall, coming into money at the end of their working lifetime may not have the same impact on their finances as receiving it earlier.
Most of our largest lifetime out-of-pocket costs happen before the age of 40: attending postsecondary school, getting married, buying a home, and starting a family. All of these things cost tens of thousands or even hundreds of thousands of dollars, and that’s money most twentysomethings and thirtysomethings don’t have.
Usually the solution is to take on debt or delay saving for their own retirement, or both, in order to afford these adulthood milestones. But there is better way: help from mom and dad.
Instead of leaving your children a big inheritance, opt for large cash gifts to help them establish financial security early in life. Cash gifts before 40 can have a massive impact for setting your children up on solid financial footing, even if it means leaving them a smaller amount or no money later.
You might consider gifting your child the money to max out their tax-free savings account while they’re a university student, or until they achieve a certain salary in their career. Or you can opt for large one-time cash gifts for specific life events, such as a wedding or a house down payment. This can prevent your child from taking on debt, or at the very least prevent them from raiding their own nascent investment accounts.
Most importantly, cash gifts in Canada are tax-free, which means it’s better to give your child a $10,000 tax-free gift at 30 rather than leave them $100,000 taxable inheritance when you die 30 or 40 years later. After all, it’s the same money: $10,000 invested in the stock market will grow to $100,000 in 30 years assuming an average rate of return of 8 per cent. The only one that benefits from you waiting to dispose of your assets at your death is the Canada Revenue Agency.
You might worry that gifting your child money earlier in life could leave you short-changed for your own retirement, but the opposite is more likely. If you provide your adult child with smaller cash gifts before your retirement, it will probably coincide with your peak earning years. Depending on your income, you may not even need to withdraw from your investments in order to help them out.
Furthermore, leaving no inheritance means the nest egg that remains after your cash gifts is entirely yours. You can spend it guilt-free and without worrying about leaving anything behind for anyone else.
Some parents are concerned that providing cash gifts will give their children a disincentive from working hard and earning their own way. Others worry that their children will waste the money as soon as they receive it, spending it frivolously on items or experiences they don’t need. But you take those same risks with an inheritance – except in the event of postponing your wealth transfer to your offspring at your death, you really have no say in what becomes of it.
If you want to attach conditions to your monetary gifts to your children, you’re free do to so. And since you’ll still be alive when you make these gifts, you’ll be able to enforce those conditions, too. But controlling our children and their finances this way should not even be necessary.
Making sure your children spend the money you bestow on them responsibly depends on giving them a good financial education in all the years before they receive it. Hopefully knowing you’ll be watching and silently judging how they spend your wealth while you’re still alive will be enough to make your children use it well. If you really want to drive the point home, remind them again they’re getting this money now because no inheritance is coming later.
And therein lies one of the greater benefits to gifting your children money earlier rather than later: You are alive to see them benefit from it. Getting the chance to see your child start a company, buy a home, or simply live without the stress of debt is a joy for any parent. The alternative of watching them struggle financially while your retirement accounts balloon in size beyond what you can spend means no one is using that money to its full potential.
Getting the best return on investment on your dollars doesn’t mean amassing the highest possible balance in your accounts. It means using your money when and where it can have the greatest impact on your life and those of the people you care about. And for your children, that’s sooner rather than later.
Bridget Casey, MBA (Finance) is founder of Money After Graduation, a financial e-learning company. You can follow her on Instagram at @bridgiecasey and Twitter at @BridgieCasey.
Bridget Casey