Warren Buffet, who along with his investing prowess has a gift for a turn of phrase, once told an interviewer that he wanted to give his children enough money so that they would feel they could do anything, but not so much that they could do nothing.
That encapsulates the ﬁrst challenge when giving money to one’s children: ensuring that it actually helps them to live their best lives. The second is one of real and perceived fairness among your various progeny. You don’t want gifts bestowed with the best of intentions to end up being a source of family discord now and after you’re gone.
WHERE DO YOU START?
Judicious planning, good communication and professional help can all help you meet both challenges, Nicola Wealth ﬁnancial advisors Ron Haik and Ethan Astaneh assured clients in a recent instalment of the Wealth Exchange podcast.
As with other forms of ﬁnancial planning, transferring wealth between generations is governed by a hierarchy of needs and a life cycle as both you and your children age. It typically begins with registered education savings plans (RESPs), which have both government assistance – up to $7,200 per child and – tax efficiency to recommend them.
But there are other vehicles that can be put to more uses, such as trusts, contributions to the child’s tax-free savings account (TFSA) and transferable life insurance policies. Many parents seek to impart ﬁnancial habits and skills along with the money itself, by creating a series of incentives to, for example, ﬁnish school and strive for long-term goals.
What’s equal is not fair and what’s fair is not equal
If you have more than one child, though, very quickly the issue of fairness raises its head as their needs and opportunities diverge. One child may receive a post-secondary scholarship while another may enrol in a particularly costly program. That’s without even considering risks such as addiction or long-term health problems.
“Every parent is likely to want to root their gifting in the principles of equality and fairness,” said Astoneh, host of the podcast series. “Often what’s equal is not fair and what’s fair is not equal,” added Haik, a senior ﬁnancial planner and the Ontario Regional Manager in the Nicola Wealth’s Toronto office.
It gets more complicated still when adult children enter their nest-building years. They might begin cohabiting with a partner before marriage or before you even know about it, which can give the partner a claim on some of their assets. You may welcome the addition to your family or you may distrust them and anticipate an eventual breakdown of the relationship.
Depending on where they live, this may be your children’s time of greatest ﬁnancial need, as they attempt to get a foothold in a rapidly inﬂated housing market; you can provide a down payment for a home purchase that they’d never raise on their own. If you’re wary of your son- or daughter-in-law’s motives, however, you may wish to call it a loan rather than a gift, Astaneh suggested. You can structure it as a promissory note that carries no interest payments and need not be reported on taxes, yet still have a claim on it should the relationship go south.
Whether you dole out inheritances while you are still alive or from your estate after death, there is always the risk of resentment among survivors over their comparative treatment. “Being the recipient of a gift is inherently subjective,” Astaneh observed. “Subjectively, it almost always feels like you were treated unfairly.”
Often, it’s not the money left over that causes the rift, Haik pointed out. “It’s that $50 painting that everyone grew up with. It’s the one piano that three kids learned to play on.”
Communicating your intentions long before your passing for these so-called material, non-ﬁnancial assets can go a long way to avoiding conﬂict. So can having professional estate planners, whether to run interference or to take emotion out of the process and replace it with standard practice and experience. Still, “sometimes the solution is not going to be a technical one,” Astaneh said. “This is not a scientiﬁc exercise.”
Giving to your children (and possibly grandchildren too) involves not just good investment management and tax planning, then, but also soft skills such as empathy and good communication. Moreover, your family’s intergenerational wealth transfer plan has to be continually revisited, Haik said, as circumstances change. “You can’t just set it and forget it.”
PASS IT ON
Are you thinking about giving money to a child or adult children? If so, ask yourself the following 5 questions to test your preparedness.
- Have you identiﬁed the amount you can comfortably give to your children without impacting your own ﬁnancial security?
- Have you identiﬁed how to structure the gift and the best place to source it from to protect the gift?
- Have you thought through how to communicate the gift to the family such that adverse relationship outcomes are avoided?
- When is the best time to provide a gift commensurate with your family’s values?
- Is there a more tax-effective way to effect that gift?
If you don’t have a ﬁrm grasp of these key elements, talk to an advisor who is experienced in intergenerational wealth transfers.