Giving While You Live and Other Options for the Huge $30 Trillion Intergenerational Wealth Transfer

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by TD Insurance

Personal Finance Family Finance

The best way to transfer wealth is rooted in a foundation of financial literacy, open discussion and honest communication

While inheritance is still a primary means of transferring wealth between generations, many are instead adopting a While inheritance is still a primary means of transferring wealth between generations, many are instead adopting a “give while you live” mentality. Photo by Getty Images/iStockphoto

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The Great Wealth Transfer represents an unprecedented transfer of capital and values ​​from one generation to the next, moving approximately $30 trillion from baby boomers to 90 million millennials over the next decade.

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While every family is unique, the best way for parents to pass their wealth on to the next generation is rooted in a foundation of financial literacy, open discussion and honest communication.

Since women generally live longer than men, a generation of baby boomers may inherit the first wave of this transmission upon the death of their husbands. This wealth can then be passed on to their millennial children.

While inheritance is still a primary means of transferring wealth between generations, many are instead adopting a “give while you live” mentality.

Financially savvy parents may choose to open a Registered Education Savings Plan (RESP) for their children at birth as a tax-sheltered way to save for and invest in their post-secondary education. On their child’s 18th birthday, parents can choose to contribute to that child’s tax-free savings account (TFSA) so they can learn about investing while growing their wealth for the future.

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After graduation, these savings vehicles, along with financial assistance from their parents, can help young adult children with the equity needed to buy their first home. About 30 percent of homes bought by millennials contain capital donated to them by their baby-boom parents, but younger generations who don’t have access to such money continue to experience financial hardship due to the increased cost of living and an inflationary housing market.

In addition to being a way to support your children financially, the strategy of giving while you live is a tax-efficient way to transfer wealth. Canada, for example, does not have estate taxes like many states in the United States, but there are probation costs that must be paid through the estate upon death. To avoid these costs, many choose to give away their wealth while they are still alive, as Canadians can give an unlimited amount of money as gifts without being taxed.

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For example, a tax-free way to pass on wealth to the next generation is for parents to donate the money they earned on the sale of their home as they downsize. Life insurance is also a smart way to transfer wealth because it is creditor’s proof, guaranteed and tax free.

Asset transfer is as much about passing on knowledge in the field of asset management as it is about passing on the capital itself. Often underestimated, financial literacy remains at the heart of how parents protect and grow their wealth, transfer wealth to their children, and teach their children how to do the same for generations to come.

As the saying goes, give a man a fish and he eats for a day, but teach a man to fish and he eats for a lifetime. Instilling healthy financial habits in your children at an early age can help them make thoughtful, long-term financial choices.

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It’s important to approach conversations about your estate in a way that makes the most sense for you and your family. While it may be inconvenient, talking about money while you are alive and healthy is good practice so that the next generation understands what will be passed on and how to manage and protect their wealth.

By being candid and honest well in advance, surprises should be avoided and an often lengthy and emotional process can lead to success.

Women so often react negatively to the concepts of budgeting, investing and planning.

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Wealthy parents face a delicate balance when passing their money on to their children – especially the quirky ones

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Every parent wants to make sure that their children are taken care of after they pass away. The first step is to prepare a will and keep it up to date by discussing it with a financial advisor every few years or as circumstances change. About 60 percent of Canadians have no will; for these Canadians, the government controls where their money goes, which can lead to family squabbles and unnecessary costs and delays to the estate.

Keep in mind that striving for a fair distribution of wealth does not always mean an equal distribution of wealth. For example, one child may be successful and financially stable while the other struggles with greater financial hurdles. For the latter, putting money into a trust can be a viable option so that they have a consistent income. A moderator-led family gathering to explain wealth distribution, answer questions, and make family members feel heard can reduce conflict.

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A wealth management advisor can coach you to understand the smartest way to transfer your money and guide conversations with your family along the way.

It doesn’t matter how you transfer your wealth – whether you teach children about wealth management through financial literacy, give money while you live through financial gifts, or give an inheritance – when money is involved, honest and open communication is paramount and can save money, headaches and time in the long run.

Alexandra Horwood is a portfolio manager and investment advisor at Richardson Wealth.

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