How can clients best share their 'never money'? Family office expert looks at both the practical and emotional considerations
When it comes to gifting money, it’s a good idea to understand tax-related considerations. In his report, Give a little bit…, Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth Management, explains that “there can be taxes that arise depending on what is made as a gift.”
If you have what Golombek refers to as “never money” - money that will never be spent in your lifetime - he suggests that “you can make ‘inter-vivos’ gifts during your lifetime, or ‘testamentary’ gifts upon your death. You should only use ‘never money’ for inter-vivos gifts to avoid depleting funds that you will need for yourself (and your spouse or partner) during your lifetime(s). By making gifts during your lifetime, you will often be able to see your beneficiaries enjoying your gifts, and there may even be opportunities to reduce taxes.”
In my experience, ultra-high-net-worth families generally have an abundance of “never money” and may desire to share their wealth and the opportunities it affords with their loved ones. Though their financial circumstances typically allow them to gift in large amounts frequently, they understand that just because they can, doesn’t always mean they should.
When it comes to gifting, ultra-high-net-worth families often look to answer questions such as:
- Instead of having my child pay a mortgage to the bank, shouldn’t they just pay us?
- How do we gift and not risk our child losing half of the gift to a spouse or partner if that relationship fails, without negatively impacting the relationship by providing a “strings-attached gift”?
- At what age or life circumstances is it best to gift?
- Should we do more frequent smaller gifts or larger, less frequent gifts?
- Should we gift in the form of a monthly or regular income, or is it better to give lump-sum amounts and let our child manage the gift?
- Should we provide a gift or extra compensation to a child who acts as our executor or power of attorney?
- Can we be fair and gift unequally or at different times to our children, or is it better to gift equally or at the same time in order to be fair?
- Is it better to gift in-kind or in cash?
Some of these questions speak to the numerous practical considerations surrounding gifting during one’s lifetime. Multi-family office clients have a deep desire to understand the best practices regarding financial gifting to family and friends. With this knowledge, they can be confident that they are gifting in a tax-efficient manner that meets their objectives while maximizing the benefit to those receiving their gift.
Though by no means an exhaustive list, some of these other questions posed by ultra-high-net-worth clients speak to the equally important, challenging, and sometimes overlooked question of how to provide financial support in a way that means it is received and realized as the gift that it is intended to be.
Although the term “gifting” often elicits positive connotations, financial gifting is not without the potential for unintended negative consequences. With the “self-made” status or “first generation wealth” of the majority of ultra-high-net-worth families comes the understanding of the great joy that comes from making it on their own. They are wary of taking away an incentive to work and do not want to inadvertently deprive their children or other loved ones of the life experiences that were foundational to their success. If mishandled, gifting may also contribute to financial dependence, a sense of entitlement, a lack of appreciation for the true value of a dollar, or taking for granted the blood, sweat, and tears that created the family wealth.
Gifting can undoubtedly make it financially easier for the family members receiving the gifts, but “having it easy” does not often reflect the work ethic, principles, and values of those families who are great builders of wealth. This is not to say that financial gifts should not be given or, if they are, that they are destined to have negative consequences. Instead, I want to highlight that the act of financial gifting may be the easier part when compared to the emotional, relational, and psychological aspects of gifting, which are often the far more important, and yet overlooked, elements of gifting.
Warren Buffet famously said the perfect amount to leave to children is “enough money so that they would feel they could do anything, but not so much that they could do nothing.” Though Buffet is talking about how much he will leave to his children, how much one should gift their children during their lifetime has similar considerations and is often a more pressing matter. Though Buffet talks about a purely financial bequest, every parent knows that there are many other elements to what they bestow on their children. It is necessary to spend deliberate time and energy determining the money you will leave or give to your children. However, often the greatest gifts to one’s family are not the gifts measured in dollars and cents, but rather that of time. It is just as necessary to spend time discussing, determining, and documenting the values and beliefs you are passing down to your children and sharing the lessons and knowledge at the foundation of these.
Today, most organizations have a mission statement. Though there are necessary differences between leading a family and leading an organization, this practice is relevant and beneficial to both. Indeed, the creation of a Family Mission Statement is recommended. Working through this with an advisor enables a family to clarify and document such matters as their values and beliefs, what they hope to accomplish together, how they will work towards achieving what is important to them, and the ways they will recognize when they meet with success in these areas. Often the passing of this knowledge is thought of as a one-way street – from the older generation to the younger. However, it is crucial to involve younger generations in this conversation. Determining the beliefs, values, purpose, and what is most important to the future stewards of the family is necessary for its multi-generational success.
When it comes to wealth, it has been said that the first generation makes it, the second generation spends it, and the third generation loses it. With the beliefs and values of an ultra-high-net-worth family collaboratively determined, explicitly documented, and effectively communicated, family members of wealth should be prepared for gifting – and most other things that come their way. Though just one step in an all-encompassing family wealth strategy, a well-developed gifting plan can play a significant part in helping to avoid the realization of this foreboding saying.
In our next article, we will explore the considerations of ultra-high-net-worth families surrounding when and how to disclose the details of their family wealth to their children.
Marvin J. Schmidt (CIMA, CFP, TEP, B. Comm) is the Founder, First Vice-President, and Senior Wealth Strategist of The Schmidt Investment Group, an award-winning multi-family office and wealth management practice in Canada at CIBC Private Wealth Management. Marvin is recognized as a top wealth strategist and leader in the investment industry in Canada. In 2020, he received the award for Canadian Advisor of the Year in the national Wealth Professional Awards.
Visit www.TheSchmidtInvestmentGroup.ca to learn more about Marvin J. Schmidt and The Schmidt Investment Group.
CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. “CIBC Private Wealth Management” is a registered trademark of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc. Marvin J. Schmidt is the Founder, Principal and Senior Wealth Advisor of The Schmidt Investment Group with CIBC Private Wealth. The views of Marvin J. Schmidt do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.
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