Advisor explains that ‘early inheritance’ can come at various stages of life, explains his role in facilitating that process
Canadians have become pretty used to the idea that mom & dad might help out with a first home purchase. Real estate prices, intergenerational wealth gaps, and the sheer inaccessibility of that first rung on the wealth ladder have made a conversation about ‘early inheritance’ into a mainstream part of financial planning and wealth building. Percy MacDonald, though, is seeing these transfers occurring at some unexpected stages of life. He’s recently been working on a few cases where long-retired parents are using their accumulated assets to help their children retire.
MacDonald is a financial advisor with Assante Wealth Management in Halifax NS. He explained some of why he has seen an increase in intergenerational gifts in recent years, especially those impacting later life stages than a first home purchase. He outlined how he helps clients navigate these issues and how he can facilitate family conversations about early inheritances that some families might not think of otherwise.
“I’ve seen it where parents will help their adult children get started in life, managing the increased cost of living, education, and housing. In doing so they’ve been pushing off their own retirement, only for their own parent to say ‘why don’t I start to give you some of what you would eventually inherit now’ and help them retire,” MacDonald says. “It’s not what we had always thought of, with parents helping adult children buy a first home.”
MacDonald sees a number of factors influencing the willingness of older parents and grandparents to help out the next generation of their family. One, he notes, is a level of guilt around just how hard things have become in terms of the cost of living. Another is the gradual realization, among some older Canadians, that they couldn’t possibly spend their savings in their lifetimes. Facing that ‘good problem’ MacDonald says that many people will give gifts to their children and grandchildren in order to see their life’s legacy play out firsthand.
While the intention behind these gifts may be the same as a traditional inheritance paid after death, MacDonald notes that they can sometimes come with different tax and estate implications. He has found himself and other advisors involving accountants and lawyers in their clients’ plans at an earlier stage in order to manage any issues that could present themselves.
Just as he might introduce conversations with professionals, MacDonald often works to facilitate conversations about these early inheritance gifts. He specializes in serving multiple generations of a family, and therefore has a degree of visibility into each generation’s needs, goals, and means that the individual family members won’t make themselves.
“When you talk to grandparents, you're talking about the estate plan, you're reviewing their will and how their funds are going to be dispersed, you're reviewing their life insurance you can then then facilitate the family meeting,” MacDonald explains. “Once you've passed away, your will ends up speaking for you so I try and have the parents and the grandparents sit down and have a conversation and explain what is being given, why it’s being given and the tax implications.”
While a growing number of clients are coming to him with plans to give pieces of their children or grandchildren’s inheritances away early, MacDonald says he can often introduce the idea. Doing so, he explains, requires care and tact. He can’t outright tell the oldest generation that their child is struggling to save for retirement and that they should help out. Instead he’ll ask that generation about their wishes and plans for their assets if they should pass away.
In that conversation, he can ask if his clients have ever considered giving a gift of inheritance to their children or grandchildren before passing on. Sometimes the answer will be a flat no, which ends the conversation then and there. More frequently, though, MacDonald hears that it has been a topic of consideration, or something that his clients might not have even known was an option. He would never cross the line of introducing the idea to a potential gift recipient, and will only introduce the idea to those generations once the plans have been firmed up with the gifting generation of a family.
He's clear to highlight the risks and drawbacks that can come with early inheritance gifts, too. MacDonald explains to his clients that if a gift is too large, occurs during a market downturn, or comes too early in their own plan, it can put them at risk of outliving their savings. He works to ensure that plans remain intact and robust despite any lump sums distributed as early inheritance.
As other advisors see more families taking similar approaches to the intergenerational wealth transfer, MacDonald encourages them to embrace these unconventional approaches. It can help younger generations build wealth of their own, while positioning the advisor as an essential relationship for each generation of the family.
“There's a lot of trust that has to build to have those conversations,” MacDonald says. “Just ask the questions. Slow down and be quiet and let them tell you their story, because unless you know the big picture, you really can't help.”
