Garry Marr: The pros and cons of doling out inheritance with a warm hand

Watching the next generation benefit from their inheritance can be a joy, but the process comes with risksYou can save this article by registering for free here. Or sign-in if you have an account.Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.Canadians are going to inherit more than $1 trillion in wealth, but the question is whether to force recipients to hold on until the will is read or give them some money now when they need the cash.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.The spring housing market is sure to set off another call to the Bank of Mom and Dad and/or grandparents to take advantage of a steep drop in house prices. Beyond housing, Ottawa has unleashed tax-efficient savings plans over the years that are tempting to contribute to for the next generation.Tannis Dawson, a vice-president and high-net-worth planner at TD Wealth, said her practice sees parents who can afford to give to their children and will draw up a plan to incorporate giving to them.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.“We are conservative with the plan,” she said, adding they will factor in increased lifestyle expenses and a low rate of investment income. “If it looks like you are going to give this much to your kids, and lots of them would just rather give with a warm hand now.”The First Home Savings Account (FHSA), tax-free savings accounts (TFSAs) and decades-old registered retirement savings plans (RRSPs) are tough for younger Canadians to maximize contributions into, and that’s where inherited wealth comes in.The logic is that a warm hand allows parents and grandparents to see children enjoy money, but it also helps them start investing and form good habits.Dawson said FHSAs have become very popular among parents.“They love it because it is locked in and it’s not like a TFSA, where they can take the money out,” she said. “It’s either used for a house, or it can go into an RRSP … and they get a tax deduction.”FSHA contributions, which are up to $8,000 annually and $40,000 lifetime, lower your taxable income on the way in, and withdrawals are tax-free on the way out if used for a home — the best of both worlds.The TFSA is approaching 20 years old and allows up to $7,000 annually to be transferred and ultimately invested on a tax-free basis. RRSPs designed around sheltering money from tax — to be withdrawn when you are in a much lower tax bracket — are still popular.“One of the questions is are they ready to receive this money, are they mature enough?” Syd Budhu, an executive financial consultant at IG Wealth Management, said. “Once you give it to them, it is gone.”That is the first problem with programs such as the FSHA, TFSA or RRSP. If you want to give your child or grandchild money, you are usually giving up control.“Like your spouse, you cannot make a TFSA contribution for your child. It has to be a gift,” Budhu said. “You could provide that $7,000 for the TFSA, and the recipient might not even follow through with a contribution.”The bigger issue for clients is whether they can afford to give away money.“We always advise not to give away money you’re not sure you can afford retirement or a long-term care issue,” said Budhu, adding that a lot of stress testing goes into that.Greg Moore, partner and portfolio manager at Richter LLP, a business and family office, has high-end clients who view issues through a multi-generational lens.“Even though our families are in a very rarified bucket of wealth, one of their biggest concerns is how to engage the next generation around financial literacy and wealth stewardship without creating entitlement or disincentivizing the next generation,” he said.To be clear, there are many Canadians who cannot give money to their children, not to mention parents in seniors’ homes who can only afford their circumstances because of their kids’ generosity. Many have no money to give now.“All of us struggle with the same sort of concerns about how to optimize your kids’ opportunity set and give them the tools they need to be successful. It can be financially successful or socially successful,” Moore said.The risks are similar, with parents concerned that children will blow the wealth.“We have an environment now where social media has told people how to invest their money,” he said. “We live in an environment where sports betting has become omnipresent. People like that dopamine of taking that risk, and they transpose that into the arena of investing.”Moore said sometimes you just have to define a “risk-taking budget” for children, and that will allow them to take a bet on something.“Then they understand what happens when they make poor investment choices and how difficult it is to speculate with any degree of certainty to build wealth,” he said. “You would have another bucket for long-term durable wealth.”Legal implications are paramount, and controlling money becomes even more complicated when spouses are involved.Amelia Yiu, an estate litigator at Elm Law Professional Corp., said they don’t in general recommend giving money to children because money could be required for their care later in life.“None of our children are really angels, and it creates an air of entitlement,” she said, adding she sees problems all the time where a child is named a joint owner in a house and that person decides they want to do something with the house. “Now they are on as an owner. They can force a sale or any number of things.”Many decisions are driven by a desire to avoid administrative taxes or probate fees, but the lawyer said they are a “tiny drop in the bucket” compared to the other estate issues.That spring housing market looks tempting, but one key question is whether you are giving your child a gift or a loan.“A lot of times when someone is separating and Mom and Dad gave $200,000 towards the house, then all of a sudden it was a loan and not a gift,” Stephanie Ostrom, another lawyer at Elm Law, said. “So, how are you going to do something about that? The way to do something is to create a marriage contract or cohabiting agreement that specifically excludes that gift from the equalization or property division process when they separate.”Teresa Palandra, president of Mercer Canada, agrees that a major consideration is factoring in risks to your own lifestyle, but believes people are talking more about the inheritance issue more because Canadians are feeling financial pressure.“They are having a hard time saving for the future,” she said.She also said they conducted a survey recently that found 70 per cent are feeling increased personal financial stress. The same survey found 40 per cent cut back on spending and another 30 per cent have reduced their savings or dipped into their savings.“This dynamic is increasing the need for children, adult children, to rely on their parents for financial help with things like purchasing real estate or even saving for retirement,” Palandra said. “Approaching inheritance as a shared process can help families in building stronger financial futures together.”She said it comes down to a frame of mind, which is built on financial literacy and education.“Inheritance is intended to complement and not replace an individual’s own savings and investing. But knowing that you’re going to be getting certain amounts of money can actually help an adult child better plan for the future,” she said.Palandra said every parent is going to be in a different situation in terms of what that inheritance could look like or not.“It’s a very personal thing, and it’s very individual, and it definitely is not one size fits all,” she said. “But what I would say to parents who are even contemplating this is they need to make sure that they’re getting the right advice as well in terms of protecting themselves first.”Giving to your children is one thing, especially if it helps avoid taxes, but having enough left over in old age, as life expectancy keeps rising, is another.• Email: gmarr@postmedia.comPostmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. 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