As the cost of raising children, attending postsecondary education and buying a home steadily rises, a growing share of Canada’s silent generation and baby boomers are looking to gift part of their wealth to their grandchildren.
The largest intergenerational transfer of wealth in history is currently under way, with an estimated US$84-trillion expected to pass into the hands of millennial and Gen Z inheritors by 2045, according to Cerulli Associates.
Historically, financial advisers and estate planning experts say, most people would bequeath their wealth directly to their children, and leave it up to them to share a portion with their own kids if they chose. But some grandparents are setting aside money specifically for the second generation, and many are choosing to give while living.
“If I had to guess it would likely be in part because of how expensive it is to live in cities these days in Canada and raise kids,” says Jessica Feldman, a partner and wills and estate lawyer at Bales Beall LLP in Toronto, who adds that she’s seeing more and more grandparents give directly to their grandkids.
David Sweeney, senior wealth adviser at Sweeney Bride Strategic Wealth Advisory with Wellington-Altus Private Wealth in Squamish, B.C., noted that it isn’t uncommon for grandparents to feel that their adult children are doing well enough that their money would create more of a difference for their grandchildren.
“As a grandfather myself, … even though our grandkids are less than five years old, there’s a lot of time in front of them for us to really help make a big impact to the point when they are 25 or 30 and starting to make some financial decisions,” he says.
One in three Canadian grandparents are currently financially supporting their grandchildren or adult children, according to an October survey by Bloom Finance and Angus Reid. Of those respondents, 44 per cent said they felt obliged to help due to the rising cost of living. Half said the amount or frequency of financial support they’re providing has increased in the last two years, with 22 per cent of those supporting their grandchildren saying they were providing more than $5,000 a year.
Mr. Sweeney said one common approach is to fund a grandchild’s registered education savings plan, such as by making the $2,500 annual contribution necessary to get the full matching $500 grant from the federal government, or even fully funding it to the $50,000 lifetime contribution maximum if it’s financially feasible.
Brenda Hiscock, a certified financial planner with Objective Financial Partners in Markham, Ont., says grandparents should either add their child as the second subscriber on the account, or name a successor in their will. Without that, if the grandchild is not yet withdrawing from the RESP, it would become part of their estate on their passing and dissolved.
Ms. Hiscock says she’s working with a lot of clients to plan early inheritance gifts for their grandchildren. For those whose grandchildren are already into adulthood, providing funds to deposit into registered accounts such as their registered retirement savings account or tax-free savings account is fairly common. She’s begun speaking with clients about the first home savings account in particular.
“You’re earmarking it for a good purpose, because it can be a little bit scary just to hand over cash,” she says, adding that the account also comes with a tax benefit for the grandchild.
Grandparents that want a certain amount of control over how or when the funds are used can consider a universal life insurance product, Mr. Sweeney says. The grandparent can open a policy in their grandchild’s name, add funds through the investment component and rescind control of the policy whenever they’re ready for their grandchild to access it.
Informal trust accounts – non-registered accounts that parents or grandparents can open to set aside money for minor children, with income taxed to the adult and capital gains to the minor – have been popular in the past. But Aaron Hector, private wealth advisor at CWB Wealth in Calgary, notes more people are wary of the accounts now given the lack of clarity about whether they’re actually considered trusts and require the owners to file T3 trust tax forms.
Leanne Kaufman, president and chief executive officer at RBC Royal Trust, says that grandparents who are giving during their lifetime but doing so unequally amongst their beneficiaries should document the intention of their gifts, and whether they intend the amount gifted to be subtracted from what the recipient receives when their estate is distributed. “It leads to strife in the estate settlement and ill feelings if it’s not well-documented,” she says.
Grandparents who are planning to leave money for a minor grandchild in their will should consider the timing of how it is ultimately paid out to them, Mr. Hector says.
“You don’t necessarily want someone to get a huge chunk of money when they’re 18 or 19 years old, they might make unwise decisions,” he says, adding that it’s common for people to require the grandchild not be given their inheritance until a later age, such as when they’re 25 or 30. If the inheritance is a particularly large sum of money, a will might set out two or three lump sum payments at different ages. “If they make an unwise decision on the first half or third, then they get another crack at it.”
People can also stipulate in their will for the inheritance to be held in trust for the grandchild and used only for certain purposes, Ms. Feldman says. For clients who want their grandchildren to use the money for education, she says she often inserts a clause into the will saying the funds can be used not just for tuition, but also for other expenses like room and board, books, and travel to and from the institution, and that if there’s money left over by the time the child turns a certain age the balance will be paid out to them.
Ms. Kaufman notes that grandparents seeking to provide for a disabled grandchild can set up what’s called a Henson Trust, which is structured to ensure the beneficiary still receives any government disability benefits they’re entitled to.
Each trust created by a will is effectively its own taxpayer, Ms. Feldman says. Trusts are taxed at the highest marginal rate if the income is taxed within the trust; however, while the grandchild is drawing on it, trustees often allocate the income earned in a year to the grandchild, and it’s then taxed at the beneficiary’s lower tax rate.
But “the difficulty is, if the grandparent dies while the grandchild is eight, there’s a 10-year gap where the trust generates some income – probably not big dollars, but some – and will have to file a return. That tax is paid at the highest marginal rate,” she says.
