Everybody knows you can't take it with you but the bigger question is when should you give your money away and how much should it be It's a question wrapped up in emotion, philosophy and financial planning.
It's no small issue with the passing of inheritance to the next generation expected to be the largest in history with some estimates putting it over a trillion dollars. Who gets that cash
A survey done a few years back by the Royal Bank of Canada found 57% of Baby-Boomers in Canada have or expect some inheritance. Those same Boomers are now grappling with the question of when do they hand that money to their kids with 61% at the time of the survey saying they planned to pass on money during their lifetime.
David Foot, an economist and author of the bestselling , says some of the old paradigms of inheritance are changing.
“Basically inheritances tend to go to one generation, they seldom skip a generation. But for the twenty somethings today if the inheritances skip a generation it will be their grandparents giving them money,” says Mr. Foot, noting the phenomenon is already taking root. “The people with a lot of the wealth are 75 plus or even 65 plus, ahead of the Baby Boomers.”
If you wait until you die to give away your money to your children, they'll probably be too old to get much enjoyment out of it because they'll be close to retirement themselves.
There are some financial advantages to giving it away while you are alive. Even though there is no inheritance tax in Canada, the general thinking is the estate does pay because it is faced with capital gains taxes on assets. At the time of death assets are considered sold and taxes owed on gains. Some provinces also charge probate fees of as much as 1.5% on an estate.
Jamie Golombek, managing director of tax and estate planning with CIBC Planning Private Wealth Management, notes there are no restrictions on gifts in Canada, so parents don't have limits on what they can give to children while still alive.
“If you give it well in advance you have three benefits. One, your kid can use the money today. If they've got debt on a mortgage, or any kind of non-deductible debt, the rate of return effectively on your family [wealth] is enormous,” says Mr. Golombek, noting if your child has a mortgage at say 4% and you give them a half a million dollars to pay it you are getting a pre-tax rate of 7% to 8% on that money.
A second consideration is your own tax rate versus your child's. If you are in the top marginal rate, 46% in Ontario, you can give them the money once they hit 18 and the investment income could be taxed at a lower rate. “The entire economic [family] unit will be higher for the 20 to 30 years,” says Mr. Golombek.
The third play is strictly capital gains. You give them cash now and they invest it in stocks and bonds, there is no deemed disposition when you die because they own it.
Certified financial planner Jeanette Brox says one issue parents fear is giving money to their children and then losing the cash because they money is poured into a house which a spouse might get part of in a divorce.
“One thing we do sometimes is set up trusts for grandkids down the road,” says Ms. Brox, adding one way grandparents can help their children without directly giving them money is contributing to education costs.
A grandparent contributing the maximum $2,500 to Registered Education Savings Plan would not only attract the maximum 20% grant from the federal government of $500 annually but it leaves the parent with that much more to contribute to their own savings such as an RRSP.
You can also invest in insurance to create wealth for children while still controlling the cash, says Mark Halpern, of . “You buy an insurance policy for your kid and stuff it with money. You buy it on their life and overfund it and then when they are responsible say ‘I bought you this nice present and now it's yours' and they can access the money,” says Mr. Halpern. “You can also buy it on your life and change the ownership to your kids and when they access the money, they'll pay it at their marginal rate.”
He also has good advice if you're skittish about giving away money to the children. “I like the idea of gifting something and see how they handle it,” says Mr. Halpern. “It's a good idea to give in stages. Is there a gratitude factor and are they handling it responsibly.”
His best recommedenation, however, is first and foremost to make sure you don't give out so much that you run out during your own lifetime — something that has happened to his clients.