These Four Strategies Can Help Families Ensure a Smooth Wealth Transfer | Globe & Mail

The greatest wealth transfer in history is underway, with an estimated $1-trillion set to be passed down in Canada by 2026. This unprecedented shift is happening one family at a time, creating a pressing need for tailored financial advice to help navigate the complexities involved.

Wealth transfers are full of opportunities – and challenges too. Keeping these four strategies in mind can help high-net-worth families to avoid pitfalls and ensure a smooth process, says Russell Feenstra, Wealth Advisor | Client Relationship Manager at Nicola Wealth Management Ltd. in Vancouver.

1. Come together to plan

Sometimes, the senior generation is ready to pass on wealth just as the heirs are ready to receive it. However, this alignment is not always perfect. Planning for a wealth transfer involves not just financial decisions but emotional ones as well. Mr. Feenstra recommends using a third-party expert to act as a guide through the process.

To initiate discussions, Mr. Feenstra suggests choosing a natural life stage, such as the graduation of the next generation from post-secondary education. It’s not necessary at that point to bring up specifics about the family wealth and its inevitable transfer, such as “How much” and “When.” Instead, this is an opportunity to begin conversations about financial literacy, expectations (if any) about what to do with the money, and legacy.

This is especially important for families with businesses that include multiple generations. Not all members of the next generation may be involved in the direct business succession plan. But Mr. Feenstra says it’s important to identify strategies to communicate effectively with each family member in a manner that speaks to them. He notes that the most successful transfers include family members in ongoing discussions, ensuring that both givers and receivers are on the same page.

2. Focus on tax efficiency by ‘giving while living’

“The biggest threat to wealth tends to be taxation,” Mr. Feenstra says. One way to mitigate this is by having the older generation transfer assets to their children and grandchildren while they’re still around.

The “giving while living” or “early inheritance” strategy has significant tax implications. These gifts are tax-free in Canada, avoiding the potentially hefty tax bill that’s incurred if the money is passed along as part of an estate after death. There are also mechanisms to still protect the assets, such as for many families looking at early asset transfers.

3. Use insurance to facilitate wealth transfers

Insurance can be an efficient way to transfer wealth from one generation to another as it can often allow a family to bypass a lengthy and costly probate process. This too has tax advantages.

“Insurance is largely a tax shelter if done in a certain form,” Mr. Feenstra says. “It has a special place in the Income Tax Act that has stood the test of time in all budgets.”

With permanent life insurance, the death benefit is typically tax-free. That gives beneficiaries a lump sum to help cover estate taxes, remaining final expenses and other financial obligations.

Beyond ensuring the financial well-being of loved ones, insurance can also enhance the value of an estate. For example, there are opportunities to transfer funds from taxable investments to a permanent life insurance policy within a Canadian-controlled private corporation. This reduces an individual’s annual taxable investment income. Down the road, the designated corporate beneficiary receives a tax-free death benefit, making for a tax-efficient mechanism to move funds from a corporation to an estate.

4. Align on an intergenerational philanthropic strategy

Many high-net-worth families prioritize charitable giving. Part of the wealth transfer process can involve aligning on giving as part of a legacy. That’s not always easy.

“Within families, you can have differences of opinion on what the philanthropic efforts should be directed toward,” Mr. Feenstra says.

Having frank conversations about funding worthy causes for the next generation can be a bonding experience, helping families to explore and understand their overarching values about giving back.

Mr. Feenstra recommends holding a family meeting, putting philanthropic dollars on the table, and asking how the next generation wants to spend it. “Then you can find out exactly where everyone stands when it comes to giving. In our experience, this process is effective at engaging the next generation in family philanthropic planning.”