How to Provide an Advance on Your Inheritance

American financial planning guru, Michael Kitces, observes that many retirees, after accumulating a substantial portfolio of assets to cover their retirement spending, wind up continuing to grow their assets throughout most of their retirement. There is an element of prudence in this practice because the length of one’s retirement is unknown. However, there is a point at which at least some retirees will recognize that their assets are sufficient to know that they will never run out of money before they run out of life.

 

Some may say that this does not happen to most Canadians. That is true, or at least true for a portion of Canadians. However, as the authors of The Millionaire Next Door discovered, the wealthy are not typically limited to the NHL stars or the CEOs of the big banks or energy companies. They are often found next door among your modest-living neighbours who drive average cars and quietly accumulate significant assets.

 

Now, if you have all those assets and even modest planning assumptions show that you will be well taken care of for the remainder of your life, what is the point of hanging onto all that wealth through to age 90 or 100? Why not provide an advance on your inheritance to your children or to the charities that you support?

 

Giving to a Charity

Naming a Charity in Your Will

I address this first as a bit of a caution. A typical example of naming a charity as a beneficiary of your will is that they get what’s “left over,” formally, the “residue” of the estate. Let’s suppose that you estimate that you will have about $1 million as the residue of your estate. You have four children. You divide the residue five ways: an equal portion to each of the children and a final portion to the charity. That will work out to about $200,000 for each beneficiary, but it could be more or less depending on how the estate is handled. The charity is likely to scrutinize the actions of the executor very carefully to maximize the amount they will receive. I doubt an executor, especially if it is one of your children who is in charge, wants to deal with a charity’s legal team.

 

Alternatives

Identify a Specific Amount

An alternative to naming a charity as a recipient of one-fifth of the residue is to specify a certain amount, for example, $100,000.

 

Use Life Insurance

If you want to leave something to a charity, you could purchase a life insurance policy that names the charity as the beneficiary.

 

Give Now

The option that is available throughout your life is to make charitable donations now. The government encourages donations by providing a charitable donation tax credit of 29% on amounts above $200. If your taxable income exceeds $221,708 in 2022 (the threshold is indexed for inflation) then you may receive a federal tax credit of 33% on a portion of your donation. The provinces have their rates that will apply as well. There is a double benefit to giving now. First, you will personally see the good that your donation will do, and second, you will reduce the amount of tax that you are paying. If you share your planned giving with your children, you also have the opportunity to model your values to them.

 

Giving to Your Children

There is a tradition – if that is the right term – of seniors not revealing any of the details of their will until after they have died. Their adult children have no idea whether their parents are doing all right financially, whether they as the children are going to receive an inheritance, or even who the executor is going to be. There is also a tradition of not even having a will in place at the time of death. The unwillingness to contemplate one’s inevitable death is probably at the heart of such traditions, complicated by the fact that money is also a taboo subject.

 

Let’s assume you are willing to recognize that you will die and that you are on trend to have a significant amount of money at your death that you “can’t take with you.” If you have children who you have named as heirs in your will, why not give a portion of the money to them while you are alive? By doing so, you will get to see them benefit from your gifts and they will need to struggle a little less to make ends meet in the leaner household-forming, child-rearing years.

 

Before I make some suggestions, if engaging in this sort of early transfer of wealth to the next generation puts your financial security in retirement at risk, then it would be unwise to consider these ideas. Or, at the very least, put off the giving until you are confident that you are on firmer financial ground.

 

Provide a Down Payment

As I write this in mid-October, housing prices have dropped but this decrease is largely due to the increase in mortgage interest rates. Don’t provide funds for a down payment if they cannot afford to keep up with the subsequent mortgage. However, this can be a good approach to take if your assistance reduces the monthly payments to a reasonable amount and/or shortens the total amortization.

 

Help with the Mortgage

This can happen in a couple of ways. One option could be to provide a part of the regular mortgage payment, for example, $1,000 per month. A second option might be to supply the money necessary to pay the allowed maximum penalty-free principal prepayment. This will not reduce the amount of the monthly payments, but it will shorten the amortization of the mortgage and reduce the total amount of interest paid.

 

DO NOT COSIGN the Mortgage

You do not want to take on this responsibility. You will be legally liable if your children run into financial trouble. A down payment is a one-time event. You are not obligated to continue monthly payments beyond what you have agreed to contribute to your children. If they fall on hard times, at least you know you have helped them have a roof over their heads for a period. The principal prepayment helps your children to build up their equity in the home. None of these actions force you to keep paying the mortgage if your children cannot.

 

Help with a Car Purchase

When your children have their children, they may find that they will need a different kind of vehicle. Helping them to buy that symbol of suburban life, the minivan (or whatever the case may be), will make life more affordable.

 

Contribute to their Investment Accounts

Once your children have formed their own households, a lot of money becomes spoken for to address daily expenses, especially if they have a mortgage and/or children. Depending on their situation, you may want to contribute to one or more of these accounts.

 

Registered Retirement Savings Plan (RRSP)

Saving for retirement often takes a back seat in the earlier years. Helping your children take advantage of the long-term benefits of compounding by assisting them with RRSP contributions can support them now for their future while also helping them reduce their tax bill. Contributions have to be made by the annuitant (the RRSP owner) so you cannot open an RRSP on their behalf.

 

Tax-Free Savings Account (TFSA)

An RRSP tends to make more sense for long-term savings and for relatively high-income earners. If your children might need money in the medium term and/or they are low-income earners, perhaps engaging in some kind of volunteer activity, this is a great account to offer them financial support. As with the RRSP, the money would have to be given to your children as you cannot contribute directly to TFSAs in their names.

 

Registered Education Savings Plan (RESP)

Here I am thinking about helping support your grandchildren’s future education. You can either open an account with you as the subscriber (or joint subscriber with your spouse) naming your grandchildren as the beneficiaries, or you can give the money to your children to have them fund an RESP with themselves as subscribers. The problem with opening RESPs with you as the subscribers is that, as RESPs are considered assets of the subscriber, it is generally better to have a younger person, with a longer life expectancy, to be in charge of the account. Having said that, if your children are not doing well with their financial management, you may want to manage the RESP yourself.

 

Provide Cash Gifts

If your adult children are sufficiently mature in their management of money, you can simply provide periodic cash gifts, perhaps an annual birthday gift or a gift associated with a holiday, such as Christmas. An annual amount would typically be significantly less than a single lump sum, so it is less likely to harm you financially if you still have a cautious view of your long-term finances.

 

Fund a Family Vacation

These days, people increasingly recognize the value of experiences. What could be a better experience than a family trip together? Travelling has been a little challenging recently, given the necessary restrictions due to COVID-19, but hopefully, with careful precautions in place, safe travelling in groups can resume.

 

No doubt there are many other ways to share your wealth with the next generation while you are still alive and if you’d like to suggest a few, please feel free to comment on the social media platform where you read this, but I hope the ideas presented here may be useful.

 

This is the 168th blog post for Russ Writes, first published on 2022-10-17.

  

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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.