You’ve made a good life for yourself and your family. Your children graduated debt-free and you’ve helped them acquire their first homes. Although you have always intended to leave them a substantial estate, with grandchildren now in the picture, you are wondering whether it might be better to see them enjoy the money now.
T.E. Wealth Senior Vice President Sam Chinniah has many clients who have faced this dilemma. As there is no gift tax in Canada, giving money to your children during your lifetime can be more tax efficient. Sam, who works in the Toronto office, says, “I always remind my clients that when they are gone, their heirs will get the money anyway. If you give all or some of it to them earlier, you can improve their quality of life and take enjoyment from that.”
A guiding principle for giving money now is that the gift should help and not hinder the recipients. Sam cautions on not giving a substantial gift before adult children are established in a career to ensure the money won’t have undue influence. A frequent worry for affluent parents is whether the next generation will share their work ethic. As Sam points out, “If you give money too early or make life too easy, you may deter your children from realizing their full potential.”
Before you decide to give any amount away, you first need to establish that you and your surviving spouse or partner will have enough to live independently for the rest of your lives. If you are confident that you have this covered, the next step is to think about what you want to accomplish with your money. Winston Mundy, Investment Counsellor at T.E. Investment Counsel in Toronto, asks, “If you have been successful, what are you doing to pass your knowledge on to your kids? We have helped clients create opportunities for their adult children to learn how wealth is managed by setting up training portfolios for them.” Another option is to get the family involved in a philanthropic project, perhaps establishing scholarships, a research chair or a family foundation, where adult children sit on the board and decide what good works to support each year.
“One of the greatest gifts you can offer your children is time. This can mean helping them out financially so that one parent can be at home with the children or allowing them to not have to work long hours,” remarks Sam. Another opportunity is to create memories by paying for an annual family vacation or treating each child or grandchild to a special experience. Alternatively, if education is important to you, consider covering the costs of your grandchildren’s education, paying for private schooling when they are young and ensuring the money is there for their post-secondary ambitions later. According to Sam, “There are many ways that you can be instrumental in giving your children and your children’s children a head start in life.”
What you don’t want to do with your money is use it to control the next generation. In both Winston and Sam’s experience, this never works out well. Still, one of the most common concerns about giving money early is what happens if your child’s marriage breaks down. Planning techniques, such as an estate freeze combined with a family trust, are a tax-efficient way to address this issue. “Creating a family trust and an estate freeze will ensure the assets remain with the beneficiaries of the trust (your children) and any future growth will accrue to your children for tax purposes,” explains Sam.
One of the challenges of giving away some of your estate now is making sure that the gifts are equal. Your grown children will all have different needs and wants. Some may be single, some may be childless and those who have children may have families of different sizes. In addition, you never know what the future will bring. Once you have determined what you can afford to give, you’ll need to carefully consider how to give the money in a way that will be considered equitable. Whatever you decide, be sure to discuss your plans with your adult children so that there are no misconceptions or hard feelings. As Sam points out, “Just as there are no easy answers when it comes to distributing your estate, there are no easy answers for giving your money away. But with thoughtful planning, you can accomplish your goals.”
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