Weekend Reading: Giving With A Warm Hand Edition
CIBC’s Deputy Chief Economist Benjamin Tal raised eyebrows this week when he said that one in five first-time home buyers is getting help from their parents with a gift, on average, of $150,000. Not only are more first-time buyers getting financial aid from the bank of mom and dad (up from 15.5% in 2015) but the dollar amount has more than doubled (up from $71,000 in 2015).
While the main story here is about rising home prices and growing inequality, I wanted to address the topic of generational wealth transfer. According to a J.D. Power study, as much as $700-billion in financial assets is set to be transferred to the next generation in Canada by 2026.
Like it or not, many retirees have more than enough assets to live their desired lifestyle and leave a significant estate to their beneficiaries. Why not incorporate some planned monetary gifts to your children or to a favourite charity during your lifetime?
Assume you live a long and healthy life to age 95 or so. That’s not as far-fetched as it sounds. FP Canada’s assumption guidelines suggest a 65-year-old male today has a 50% chance of living to age 89 and a 25% chance of living to age 94. A 65-year-old female has a 50% chance of living to 94 and a 25% chance of living to 96.
Now assume you have more than enough assets to meet your spending needs for 30 years, plus you plan to remain in your home.
Would you prefer to leave a large inheritance to your children at age 95, or give them smaller and potentially more meaningful amounts at key milestones such as buying a first home, starting a business, paying for post-secondary or an advanced degree, or filling up the grandkids’ RESPs?
When I discuss the idea of giving with a warm hand with my clients there’s often resistance because of a fear of spoiling their kids. They often see financial struggles as a rite of passage, as if living with four roommates in a rundown two-bedroom apartment while you work part-time to pay your way through school is the way to build strong character.
But you can give your young adult children a financial leg up without turning them into spoiled and entitled brats.
It’s about acknowledging that your kids are coming of age in a different world where affordable housing and education, defined benefit pensions, and company benefits have all but disappeared. We’re living in a gig economy with temporary contracts, no benefits, and housing and education costs that are spiralling out of control.
Your 20s and 30s are filled with so many competing financial priorities. Why not, if you have the means to do so, help your kids through this period so they can get started on the right foot?
This doesn’t mean they’re financially tethered to you. You’re not paying their cell phone bill and making car payments when they’ve left the nest. But smart and strategic monetary gifts at appropriate life milestones can help your kids through what’s becoming an increasingly difficult financial environment.
Of course, everyone needs to put on their own oxygen mask first before assisting others. Make sure your own retirement needs are met before making large financial commitments to your kids. That means not dipping into your HELOC or heaven-forbid your own retirement savings to give your kids a down payment gift.
I’d love to hear your thoughts on giving with a warm hand versus leaving a large estate behind. Let me know in the comments.
This Week’s Recap:
Author Mike Drak finished his excellent three part series on retirement lifestyle design by taking us from thought to action.
- Part one: It all starts with purpose
- Part two: Embracing your Ikigai
I’ll be making my MoneySense debut shortly with an article on growth investing. I’ll share that along with a fairly regular MoneySense column exploring other investing topics.
Promo of the Week:
The American Express Cobalt Card has long been considered the top overall rewards credit card in Canada. Cardholders get 5x points on groceries, dining, and food delivery, plus 2x points on travel, transit, and gas.
The best part of the Cobalt card, in my opinion, is the flexible points redemption. You can use your points to pay for almost any purchase you make with your card, or transfer your points to other programs like Aeroplan, Avios, and Marriott Bonvoy.
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Weekend Reading:
Can you buy bitcoin with a credit card? Our friends at Credit Card Genius look at the pros, cons, and pitfalls to avoid.
CBC Marketplace caught two real estate agents on hidden camera breaking the law and steering buyers away from low-commission homes.
A good rebuttal to the bogus Royal Lepage “study” that showed how buying a home is actually cheaper than renting. It’s not even close:
“People are stretched thin both by the actual monthly outlay for ownership versus renting of similar dwellings, plus the gargantuan size of down payments required to even get to the position of having a large mortgage.”
You might be able to hedge your rising heating bill before this winter by locking into a fixed rate for your household energy needs. I did this thanks to a nudge from U of C economics professor Blake Shaffer:
I can’t say this enough, but if you’re in Alberta and still on a floating rate for power and gas, you should *really* switch to fixed.
Can do so with most current providers or easily switch providers online in a few minutes.
Check out your options here: https://t.co/lfyTzCV4uY
— Blake Shaffer 📊 (@bcshaffer) October 5, 2021
Here’s Nick Maggiulli from Of Dollars and Data on why it’s never too late to change.
Millionaire Teacher Andrew Hallam answers five common questions people ask him about investing.
Frugal Trader from Million Dollar Journey gives some excellent advice on how to become a millionaire.
Finally, here’s former Vanguard CEO Jack Brennan offers three tried-and-true wealth building tips in this Acorns interview.
Enjoy the rest of your weekend, everyone!
Hi
If this doesn’t come from retirement savings where would it come from? Everything once you retire is retirement savings or am I missing something. Also what are the tax consequences of this gift.
I’m also interested in your answer to above question about tax consequences.–$150,000 (selling stocks/ETFs) x 2 children makes for a big tax hit .
Dave – I would think the financial help from Parents would be from downsizing their primary residence or perhaps retiring to a second property and selling a home in the city. Personally, I don’t consider my home as a retirement asset, although probably lots do.
In my experience working with clients the gifts come from downsizing or selling a rental property (as Greg said), or from one or both TFSAs (no tax consequences), or from existing cash savings (you’d be surprised).
Just thought I’d share my story. In my late 20s I received $25K from my parent (in 2014) to help purchase my first house and double my down payment. I could have managed with less (or even nothing) but they were happy to help me out. I always assumed I was extremely lucky but from your stats I can see that I was below the average and that makes me feel a little better. I was very grateful to have this support; it was the time to help me out, not when I’ll be in my 40s and 50s. My parent was still working full time preparing for retirement and they just had the cash. No retirement savings were used.
Hi Kay, thanks so much for sharing your story. This is exactly my point – it made sense for your parents and it was the exact right time for you.
Do the children who receive house money from their parents have to declare it as income?
No. It’s a gift.
Hi John, there’s no inheritance or gift tax in Canada.
What’s the best way to do it?
1 Outright gift? But what about the implications of a breakdown of their spousal relationship?
2. An interest fee loan that they don’t repay
3. Purchase a share of their house which will result in a taxable capital gain (hopefully ) when they sell
4. Other ideas?
We are blessed to have been able to help both our children buy homes. It is a real pleasure to see the happiness they have in their homes. Funds came from the sale of our business and good planning from our accountant.
Back in my late 20s my parents helped with a down payment for our first business with a loan which we repaid but it was life changing, helped set us up to help our kids
Yes an outright monetary gift is the way to go. If you think that supporting a house is not within your child’s finances at this time; depositing some funds into an TFSA is another option. The funds can gain interest and let them decide what to use the money for. This is just a thought. 😉
Both my parents passed in 2019 when I was 51 years old (they were both 89 when they passed). My sister and I received modest inheritances and I was grateful, but I also knew how much more I could have done with some of that money years earlier and they easily could have parted with it.
Our children, now in their early 20’s, are probably a few years yet from acquiring a home but I hope that we can make some kind of contribution early enough in the process for them to make a difference. Giving them an inheritance at 60 (assuming I make it to 90) won’t be very useful I think.
My parents weren’t really in a position to help my sister and I when we were getting started but that’s ok. They have some comfortable savings now in retirement and my sister and I are both encouraging them to try and spend it all as they really scrimped and saved while they were younger.
I don’t have any kids but thinking about more charitable giving while I am alive is something I should probably consider.
I have Fred’s Book”Retirement Income For Life”. An excellent read. I would like to win this book to give to one of my 4 children.
Hi Robb, we provided financial assistance to both our Sons and consequently our Daughter-in-laws. We considered how a relationship crash might affect the gift but we believe in each team. We did however discuss the gift prior with each couple and ensured agreement to put the amount against each house mortgage. Both mortgages allow for an annual one-time payment outside of the regular monthly structured payments. Per your column, it just seemed logical to help now while it is needed rather than wait until we cross the rainbow bridge and leave an inheritance.
Thank you for the info. My current saving rate is 30%
About 30 years ago my never-married uncle asked me what to do with his will (he consulted me on financial matters). I told him that his nieces and nephews were not in need of the money, so why not pass to the next generation to help with education. He only had a very modest estate but I knew the beneficiares would benefit (Isn’t that what beneficiaries are supposed to do with an inheritance?)
My uncle passed away while the beneficiaries were still mostly in elementary or high school and I was the executor and trustee for the estate. Wben I handed over each inheritance (once they reached the age of 18 as specified by the will) I let the beneficiaries know the intent was for it to be used for education.
Out of 9 great-nieces and nephews, there are 5 engineers, 2 nurses, 1 para-legal and 1 still to be determined. I think that was a great way to deal with inter-generational wealth transfer.
My siblings and I received early inheritance, to help with house purchase and mortgage. I’ve told my parents that the 20k they gave me in my mid 20’s was probably worth 60k in the future, smaller amount early on is worth way more than a big chunk at the end of parents life.