How transferring wealth in life can prepare the next generation for an inheritance

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Canada’s wealth transfer – in which $1.6-trillion is expected to change hands by 2030, with more anticipated in the years following – is likely to happen largely after the current wealth owners have died.
But if done right, letting the next generation start drawing from their inheritance while their affluent parents are still alive could help address one of the biggest challenges: recipients who are ill-prepared for the large sums of money coming their way.
Cindy Radu, a family wealth transition advisor in Calgary, says we’re facing an “epidemic” of inheritors who are ill-prepared emotionally and in terms of financial literacy. “Families need to find ways to shift this lens,” she says.
Many well-to-do parents already share wealth with their grown-up kids through gifts such as a down payment for a home or seed funding to start a business. But some are going further by giving their children part of their assets on an ongoing basis to help the next generation get used to the responsibilities that come with wealth.
For some, this may also be a way to observe how their adult children handle big money so parents can adjust their estate plan accordingly. For example, a child who goes on a buying spree as soon as the family bank is open may end up with an inheritance in trust.
Thuy Lam, a money coach and certified financial planner at Objective Financial Partners Inc. in Markham, Ont., says families can reduce the risk of their kids “going wild” with their inheritance by normalizing the subject of money through open conversations.
“The wealth builders have had time to experience the privileges and responsibilities associated with wealth, but for the next generation there can be a huge level of worry and anxiety,” she says. “They don’t want to mismanage the money.”
It’s also a good idea to give the next generation first-hand experience as wealth owners.
“It’s like a muscle,” Ms. Lam says. “By giving your inheritors experience in managing some level of wealth, you’re allowing them to build that particular muscle.”
There are several ways to do that. Nancy Marshall, managing consultant and head of family office solutions at Toronto-based Prime Quadrant Corp., points to one family that decided to give their adult kids control over a certain pool of capital and keep the income it generated.
“They’re managing the portfolio and understanding how the income is coming in, how it’s taxed and maybe how other investment options might bring in additional returns,” Ms. Marshall says.
In such cases, it’s best to start with a modest amount of capital, she adds.
It’s also a good idea to have these next-generation wealth owners work with their parents and siblings on an investment policy statement, Ms. Radu says. That builds their investing knowledge and encourages them to think about how they want to continue growing the family wealth.
Wealth owners might want to consider giving out money in tranches throughout the year instead of providing ongoing access to the family bank, says Jason Heath, a certified financial planner and managing director at Objective Financial Partners.
That gives the recipients a chance to learn how to make decisions with large chunks of money and allows the wealth owners to observe and provide some guidance, he says.
“My advice would always be: If you’re going to give money to your children today, I wouldn’t give them 100 per cent of what you can afford to give,” he says. “Give a portion of it, re-evaluate in maybe five years and see where they’re at.”
Wealth owners should also look at how they can give money to their kids in a way that’s tax efficient for the family, such as directing some of the money into their kids’ tax-free savings accounts or registered retirement savings plans, Mr. Heath adds.
Regardless of how these intergenerational transfers transpire, communication is key. A survey conducted last year by Ipsos for Sun Life Financial Inc. found that millennial inheritors expected to get about $309,000 on average from their parents while the parents planned to pass on an average of $940,000.
Ms. Marshall says conversations about family values and wealth history can help the next generation understand their parents’ decisions and prevent conflict.
“We worked with one family that was adamant about how certain components of the finances were structured, and the kids were aware of this but didn’t understand what drove those decisions,” Ms. Marshall says. “The kids didn’t know that one of their uncles had lost millions of dollars because he had structured his wealth in a different way.”
Mr. Heath says the opening of the family bank is a good time to introduce kids to their parents’ professional services team, including their financial advisor, portfolio manager, accountant and lawyer. In a recent Environics survey of affluent Canadians, more than 80 per cent said they haven’t introduced their children to their financial advisor or taken them to a planning meeting with the professional who manages their money.
Advisors can reach out to the next generation proactively and build those new relationships, Mr. Heath says.
“When you look at the statistics about how much money moves away from advisors once the client passes away and the wealth works down to the next generation, it’s pretty staggering and it doesn’t bode well for all of these people who will soon be coming into an inheritance,” he says.
“It’s beneficial – for advisors, their clients and the next generation – to develop family relationships early on and to encourage clients to bring their adult children into discussions.”
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