The article “Leaving An inheritance? Here Are The Most Rewarding Options For Spreading The Wealth” was originally published on The Financial Post on May 13, 2016.
Most Canadians are worried about ensuring that their savings will last as long as they do — but a select group are pretty sure that their money will outlast them. And, while it might seem counterintuitive to a lot of people, many wealthy Canadians worry an awful lot about their nest egg and how best to manage it.
There is little doubt that having money is better than the alternative but, in my experience, there is a strange phenomenon when it comes to wealth that leads to an odd relationship between wealth and worry: People with modest means worry about making ends meet; people with lots of money worry about how to manage their wealth. It seems that either way, people worry — albeit differently — about money.
Building a retirement plan can help determine if someone has “enough” money to retire. This sort of exercise can also identify if someone has capital that they will not need for their retirement and if so, how much. From there, the question becomes what should they do with the excess?
For those with children, one option is to just give them money with no strings attached. Or, if you wanted to provide direction, you could help with their mortgage. Keep in mind that if you pay down their mortgage, there is nothing to stop them from borrowing back some of the newly created home equity, so it may end up the same as just giving them the money.
You may want to consider documenting a gift as a demand loan with no interest or payments. In the event of a marriage breakdown, you could call the loan and protect the gift from becoming subject to division in a divorce.
Helping with RRSP and TFSA contributions is another option. It gets the money out of your hands and the income off of your tax return and into a tax shelter. The family as a whole can pay less tax.
Buying life, disability or critical illness insurance for a family member can be an indirect way to help. If they have kids of their own, you can open an RESP account to help save for their children’s education.
For those in high tax brackets, a family trust is an option. It allows you to split income with children and grandchildren and reduce a family’s overall tax burden, in particular if your Old Age Security pension is facing the clawback, which begins at about $73,000 of personal annual income.
Some parents consider an estate freeze, whereby they lock in the value of their estate so that future growth accrues to their children, reducing tax and probate fees on the parents’ death.
If you do not have children, you can generally use similar strategies for the beneficiaries of your estate.
Whether you have kids or not, you should also consider charitable options. If you have significant charitable intentions, you can establish your own private foundation that will live on long after you. But even if you do not, many banks have off-the-shelf options — like TD’s Private Giving Foundation — that have initial contributions as low as $10,000 and can be used to create a lasting charitable legacy.
One thing that I have learned over the years working with clients is that the pursuit of happiness is not likely to be achieved through financial success. The happiness of pursuit — especially financial pursuit — can be a fruitless journey. But if you are fortunate enough to have accumulated more wealth than you are likely to need during your own lifetime, you have bought yourself the opportunity to consider some of the available options.
Jason Heath is an advice-only / fee-only Certified Financial Planner (CFP) and income tax professional at Objective Financial Partners Inc. in Toronto