Should you give your child a living inheritance?

Out-of-reach housing prices and stagnant salaries have inspired many older adults to help their children out financially before they pass away, instead of waiting until they die to give their children an inheritance.

If you have investments that are earning income (for which you are being taxed every year), and you’re not planning on spending that money in your lifetime, it might make sense to gift it to your children before you die. One of the reasons being that gifts are not taxed in Canada: the gift, whether it’s received by children, grandchildren, or another person, doesn’t need to be reported as income on a tax return.

This gift money could be used to improve the receiver’s financial situation, whether that’s paying down debt or investing at a lower tax rate. Along with the emotional satisfaction of seeing your children enjoying your legacy while you are still around, passing on an inheritance before you pass away also helps avoid probate fees which vary from province to province.

Along with these tax considerations is the question of what your children will do with the money. Receiving a large lump sum can be overwhelming for some, and if the next generation doesn’t know how to manage it, there is a chance it will be squandered. In fact, a study done by Williams Group Wealth Consultancy found that 70 per cent of affluent families lose their wealth by the second generation, and 90 per cent say it disappears by the third generation.

A possible solution is to give children a living inheritance in smaller portions so that they are not overwhelmed by the large amount. This can be used to invest in stocks, to pay down a mortgage, as a down payment on a first home or to pay down high-interest debt.

You could also help instill prudent financial habits in your kids by setting up an incentive trust where they will be rewarded with some of the inheritance when they reach a milestone, such as graduation from university, or by matching them when they save a certain amount towards retirement.

If you’re interested in learning more about the possibility of giving a living inheritance, set up a meeting with a respected and experienced estate planner; ideally someone referred to you by a person you respect and trust.