Over the last few years, the topic of gifting money to adult children has made its way onto the agenda more frequently. This is no doubt a reflection of the age and life phase of our clients but there is also a sense that the world is tougher for the younger generation. Parents are asking whether they can help their kids today, when they need it, instead of offering them a large estate gift years down the road.
Careful thought should go into whether, and how, you help adult children. Below is a set of questions to ask yourself before making any big decisions.
How may the gift affect your financial situation? Without question parents sacrifice for their kids. Time, money, career, fun – at one time or another parents take a step to the side for the benefit of their kids. In retirement, I stress that a financial gift should never put someone in a vulnerable position. Point finale. That means a gift should not force a parent to cut back on today’s essentials. Nor should it detrimentally drain financial reserves that are there to manage life’s potential curveballs. Of primacy is that the parent continues to live an independent, dignified full life.
How to extract the gift in a tax efficient manner? When you give someone a cash gift it is with after-tax dollars. And, gifting a significant sum can involve drawing on multiple sources that may bring heavy tax consequences. Imagine you had a $1 million RRSP and wanted to give your daughter $50,000. On the surface, you would think that a 5% withdrawal would be within tolerance. However, you may need to take out double that – $100,000 gross – to pay the tax and net your $50,000. Now at 10% – the withdrawal seems less doable. Having a plan on how to tap into various sources can help minimize taxes.
How may the gift affect the adult child? This is a sensitive area. Each child is an individual and reacts to incentives differently. A financial gift to one person may zap their motivation whereas another individual may march forward without consequence. The goal of the gift is to improve the life of your adult child and not impair them in the long run. It can take time to develop a well-crafted plan. Do not feel rushed. And without trying to paraphrase my grandfather but “sometimes difficulty is the greatest teacher”.
Should a gift be equal to all children? We’ve all heard the parenting adage that ‘fair does not always mean equal’. That makes sense and is applicable in many areas – especially when the kids are young or if one has a disability. At the same time, financial unbalances between siblings can create tension between them and their parents. Money can represent much more than it appears. I’ve witnessed many parents leave lobsided estates because one adult child was much better off than the others. While they may not have needed the money the fact that they were left out led to resentment and a damaged relationship with their siblings. How do you handle incongruent needs? That answer is unique to each family, but an open dialogue can’t hurt.
Should strings be attached to the gift? Most do not want their gift being spent frivolously. That makes sense. But how involved should the parent get in determining the end goal of the gift? Each adult child has their own financial situation and goals. It becomes more complex with multiple adult children. Perhaps, one has kids of their own and wants to maximize their RESP whereas their sibling does not have kids and wants to save for a home. Is one option better than the other? I’ve seen it where the gift carries a theme attached to it – maybe that it be used ‘productively’. It also does not need to be serious. My grandmother gave me $2,000 in my 20s before she died and said: “do something that you would not otherwise do?” That took me on a once in a lifetime canoe trip in Northern Ontario where I was able to afford the required float plane extraction.
How will you react to negative downstream effects? Your gift may have negative secondary effects that may irritate you. Imagine that you helped your son pay off the last bit of his mortgage. Then, the following Sunday he arrived for dinner in a fancy sports car. “What? Where did he get the money?” Well, he proudly tells you that he redirected his mortgage payment to the lease of the car. How does that make you feel? There is also the question of potentially seeing your gift divided in the event of marriage breakdown. Consider how this may make you feel. You may want to introduce a legal aspect to ensure that it is not lost in a marriage breakdown. At the same time, be conscious that adding a legal layer can be sensitive and may be more appropriate for larger gifts.
As parents we want to help our kids live their best lives. Sometimes this means emotional and financial support. Other times, it means getting out of the way and letting experience be the teacher. For those in fortunate circumstances financially helping their children when they need it most can be a pleasurable and impactful action. But it should be done with pause and thoughtfulness.
As always, our door is open if you would like to discuss.
Bryan
