As discussed in our last blog post, there is no better educator than experience. Our clients arrived at where they are today by starting early, investing for the long term, and maybe getting some help along the way. Your children and grandchildren are no different. The best way for them to learn about saving and investing is to practice. More and more Canadian parents and grandparents are helping their young adult children/grandchildren get a head start in one way or another. Whether that is helping to pay for education, funding a downpayment on a house,  financing a TFSA, FHSA or RRSP contribution, or contributing to an RESP for grandchildren.

                If you are thinking about gifting money to your offspring, a wise first step is to talk it over with your financial advisor. Depending on your ultimate goal they can help you, and your child, decide where to start and how best to allocate these gifts towards your child’s future goals. In our experience, young people are often told that they have long time horizons, in real life this is often not the case. Between an 18-year-old university entrant and a retiree there are a multitude of shorter-term goals and plans that take precedence over the long-term savings. Expenses  for education, a home or vehicle purchase, paying for a wedding, or starting a family are all costly and difficult to attain so a gift from Mom and Dad or Gramma and Grandpa is often a huge leg up for the long term.

                Of course, we cannot plan to spend all our savings on short-term goals, a young person should be allocating at least some of their savings to longer term plans to help give them an initial head start on those far-reaching events as well. Depending on what the mix between long term and short-term goals looks like, and the size of the gift we can help you plan what types of investment accounts should be opened and where the savings should be directed.

                Jamie Golombek, managing director of tax and estate planning for CIBC breaks down the potential tax savings of gifting funds to one’s children or grandchildren in this article: https://www.cibc.com/content/dam/cibc-public-assets/personal-banking/smart-advice/tax-savings-tips/pdfs/build-registered-plans-en.pdf. If you are a significantly wealthy Canadian, you probably have “forever money” which are funds that you and your spouse will never need nor have want for during your lifetimes. This money that is being taxed in your hands, could be used to help fund the success of your family long into the future. In doing so, your lifetime tax bill would be lower, and the wellbeing of your family could very well be magnified.

                Gifting funds is not without its risks or pitfalls, however. Before giving a gift, our advice to clients is to prepare for any eventuality. Usually this takes the form of giving the gift, and then promptly forgetting you ever gave it. Your children or grandchildren might not do exactly what you would expect them to do with the funds, this can be disappointing. If you want to ensure that the funds are only used for one express purpose, i.e. buying a home, wedding expenses, education costs etc. your best course of action is probably to wait until that specific event is occurring and then provide the funds at that time. Unfortunately, in doing so you will give up any tax savings and compounding growth in the name of your offspring.

                An additional risk is the divorce or separation of a child. Gifting money to your adult child who is married could potentially open them up to losing some of those funds in the event of a divorce. There are methods by which this can be prevented, however they are often costly. Again, if you believe this could happen to your family, you should consider foregoing the tax savings in favour of gifting “on demand” as life events come up that you are comfortable contributing to.

                The final, and perhaps most overlooked risk is that of a detrimental event happening because of the gift you give. Occasionally clients will give money to their children to achieve an objective that doesn’t matter to the child. For example, a parent might help their child buy a home only for that child to realize they cannot afford to upkeep or maintain their home without more help in the future. Worse even would be the parent “forcing” a child into a circumstance they don’t want to be in, and then the child resenting the parent as a result. Keep in mind the point of a gift is to benefit the person receiving it, there are potential outcomes where more harm is done than good.

                There are multiple good reasons to give money to the next generations. Depending on what your priorities are, there are different options for maximizing the potential outcomes of your gifts. If you would like to discuss your ideas for wealth sharing with your family, give us a call. We would be happy to work with you to create a plan that achieves your goals while also minimizing potential risks in the future.