RESP gifts from grandparents are one way that some families aren’t waiting to transfer wealth.Getty Images
A shift is occurring as part of the great wealth transfer, in which trillions of dollars globally are expected to move from baby boomers to their millennial and Generation Z children during the next decade: Many aren’t waiting until they die to transfer their wealth.
“There seems to be a real push to gift while alive, and largely, that has to do with the high cost of living for younger generations,” says Jeanette Power, senior wealth advisor with the Power Investment Team at CIBC Wood Gundy in Mississauga.
The “bank of mom and dad” factors into the purchases of many first-time home buyers, particularly in expensive real estate markets such as the Greater Toronto Area, she adds.
The movement to give with a warm hand may not be new, but it’s gaining more attention from advisors as their clients have accumulated substantial wealth, says Tony Maiorino, vice-president and director, head, RBC Family Office Services in Toronto.
Advisors play a key role in helping clients execute strategic ways to transfer wealth and ensure that their clients’ financial and retirement plans aren’t compromised as they help their children.
“The first thing is establishing there’s excess capital,” Mr. Maiorino says.
He says it’s vital to stress-test strategies to prevent running out of money, examining different scenarios for market returns, inflation and life expectancy. “Then, we break down the giving strategy by immediate, mid- and long-term supports.”
It’s not just a matter of carving out $300,000 from the future estate and handing it out to the adult children to buy a home, which is a more immediate form of support. Clients might also consider other suitable strategies to support their children, including an estate freeze.
“The main opportunity [in using an estate freeze] is deferring taxes and capping the parents’ taxes,” says John Sacke, investment advisor and portfolio manager with the John Sacke Wealth Management Team at BMO Nesbitt Burns in Toronto.
As he explains, the goal is to freeze the current value of a portion of an individual’s assets that otherwise would eventually be part of their entire estate upon death. The benefit to the parents is a lower tax base while alive, because income and dividends from the frozen part of the estate, and even gains, wouldn’t be attributed to them.
Taxes on the growth of the frozen estate portion would then be deferred until beneficiaries dispose of the assets, “presumably at a lower rate than the parents would have paid,” he says.
Mr. Sacke notes that some families will employ a trust for the frozen portion of the estate, facilitating distributions to beneficiaries, likely at a lower marginal rate than the parents. He says trusts can add more cost and complexity and may not be appropriate for every client using an estate freeze.
Another option for giving while living is a prescribed interest rate loan, especially in instances in which parents are helping one child more than others. The drawback is that it’s a loan, and many parents would rather not worry about their adult children’s ability to pay it back.
While gifting is a cleaner approach, Mr. Sacke says not all gifts are equally helpful. He has seen clients pay their adult children’s car loans and credit card debt. “That’s not a very effective strategy because you’re teaching bad habits.”
A longer-term strategy for giving can lead to better outcomes. That largely involves providing financial support over many years for certain goals, such as putting money into their adult children’s registered accounts, Ms. Power says.
“I see more parents funding their kids’ tax-free savings accounts [TFSA], their grandkids’ RESP [registered education savings plans] and the FHSA [first-home savings account].”
RESPs and FHSAs are often a giver’s preferred strategy because they’re more confident those assets will be put to good use, whereas money for a TFSA could be spent on anything, Mr. Maiorino says. Providing funds for the RESP or FHSA helps “create the infrastructure to support the kids at a later date.”
Of course, many parents still want to leave a legacy after death. An often-overlooked strategy is using permanent life insurance, Mr. Maiorino says.
The benefit is two-fold. Parents reduce taxable income from their non-registered investments in funding the insurance premiums. Plus, beneficiaries receive a tax-free death benefit upon the death of the surviving parent without passing through probate, which can take several months.
“And if something happens where the parents find themselves in financial trouble … they can borrow against the policy,” Mr. Maiorino adds.
Trusts are another option allowing for more governance around assets for beneficiaries. But like other approaches, these can add complexity to estate planning. “Navigating that complexity is what we’re here for as advisors,” Ms. Power says.