Sept. 7, 2021
There’s an old saying that it’s better to give with a warm hand than a cold one. Put another way, for many parents, there are benefits to gifting money to the next generation while you’re still alive or providing what’s known as a “living inheritance.”
There’s an emotional reward that comes with giving adult children money to buy a house, start a business or simply support their families, experts say, as well as financial benefits of reducing the value of your future estate. The trick is not giving away too much so that it spoils the kids, or worse, curbs your retirement lifestyle.
“Assuming parents are in a strong financial position to do so, and if there are excess funds beyond their income retirement needs, then that’s when gifting should often be considered,” says Kelly Ho, a partner and certified financial planner at DLD Financial Group Ltd. in Vancouver.
Many are doing just that. A CIBC poll shows more than half of Canadian parents have either given or plan to give a significant gift or early inheritance to their children or grandchildren, either because their offspring need the money or parents want to take pleasure in seeing their kids and grandkids enjoy the funds.
The main upside to giving while alive is “getting to see how the money is making their loved one’s life better or easier,” says Moira Somers, a Winnipeg psychologist specializing in behavioural finance.
Ms. Somers points to an example from her own life, several years ago, when her mother paid for a fence when her own family couldn’t afford it.
“Every time I look at that fence, it’s with gratitude to my mom, Ms. Somers says.
MONEY AS A ‘MAGNIFIER’
For many parents, the biggest challenge is talking to their kids about money and making sure they spend it responsibly.
“The issue isn’t so much one of spoiling [adult] children,” Ms. Somers says. “Some think about whether this will disincentivize them … or even more strongly, could this blow up their life?”
She says money is often a “magnifier” – for better and for worse. For example, a gift could enable a gambling or substance-use issue, or wind up in the hands of a “controlling, exploitative” partner. But then again, these could still be issues upon the parents’ deaths regardless.
“So instead, can you be using resources now to say, ‘I’ve got some money sitting here, and I would like you to meet with a financial adviser to find out how this could benefit you in the future,’” Ms. Somers says.
Helping adult children buy their first home is among the most popular and larger gifts parents give, Ms. Ho says.
Despite most younger clients earning six-figure salaries, she says their parents are pitching in with cash gifts ranging from $10,000 to $200,000 to help with a down payment given the average cost of a single-family detached home exceeds $1-million in large markets such as Vancouver.
However, with her older clients providing the gift, the biggest consideration is ensuring they can afford it, especially with people living longer.
“The last thing I want to see for them happen is going back to their kids for money because, depending on the situation, ‘good luck,’ ” she says.
GET ADVICE BEFORE YOU GIVE
Parents looking to provide a living inheritance to their kids should talk to their financial adviser first to make sure the sum doesn’t derail their own financial goals.
When well planned, the benefits can be many: from funding the grandchildren’s postsecondary education to helping adult children purchase a first home (or a vacation home) to saving for their own retirement or treating the entire family to a winter holiday in a warm climate.
There can also be financial benefits: Cash gifts, given while alive, will ultimately reduce the size of the estate, reducing probate fees costs and taxes on the estate, says Samantha Prasad, a partner in the tax group at law firm Minden Gross LLP in Toronto.
While gifting is common among her clients, she cautions they may not always foresee the potential impact of a gift on their tax and estate situation.
“It comes up all the time, but often along the lines of, ‘I did this. That’s okay, right?’ ”
There’s no gift tax in Canada, as there is in countries such as the United States, and no threshold for how much you can give, Ms. Prasad says.
However, she says so-called “attribution rules” may apply if you gift cash to a spouse, common-law partner or minor children or grandchildren and they use it for an investment.
“Any income from that investment can be taxed in the hands of the person who made the gift,” she says, adding it’s Canada Revenue Agency’s (CRA) way of preventing people from income splitting, which is the ability to sprinkle income to family members in a lower tax bracket.
Another misconception, she says, is that people can gift real estate, investments and certain family heirlooms without tax implications. Ms. Prasad says the CRA considers the exchange a deemed disposition, meaning any increase in value on these assets while owned by the parents may be subject to capital gains tax.
She says the best option is often giving money directly from savings, or selling an asset first, paying the applicable taxes, and then gifting the proceeds.
Regardless of how it’s done, Ms. Prasad says the will should be adjusted to account for the gifts made while alive.
“That won’t entail a full revision of the will,” Ms. Prasad adds. “But a memo should be attached noting who received the gift, its size and on what date,” ensuring division of assets remains fair among beneficiaries.
With the financial, tax and estate considerations taken care of, parents can then relish in witnessing their money doing good for their family, Ms. Somers adds.
“There are lots of problems that a gift of money can help solve,” she says. “It can be great at easing burdens, giving opportunities for experiences that might not otherwise be possible, and facilitate closer connections when an unreliable car or inability to pay for a plane ticket would have been a barrier.”
This Globe and Mail article was legally licensed by AdvisorStream.