Cents vs. sense: Considerations for intergenerational wealth management

Editor's Note

This article is sponsored by Hall O’Brien Wealth Counsel

Red-hot real estate

Sixty-two per cent of millennials are reportedly living paycheque to paycheque. Meanwhile, the cost of the average family home has risen from 3.4 times family income since the mid-’80s to nine times family income today. For many millennials, home ownership seems out of reach

Their parents however, (i.e. Canadians born between then end of the Second World War and the 1960s) stand to inherit in aggregate $1 trillion over the next 20 years. Many of these inheritors are already financially secure and are looking at how to pass along their wealth to the next generation. 

While many are not prepared to hand over large sums of cash or financial assets, many of the clients we meet with are considering buying their kids real estate. Many feel that by buying their kids an asset they are less likely to fritter the money away.

With real estate having been a hot market for a long time, they want to help their adult children get into the market sooner, before it becomes further out of reach. Giving with a warm hand so that they can participate in the benefit their gift provides is becoming a more common approach than passing wealth to the next generation only on death.

Don’t let the tail wag the dog

At first glance, it seems obvious for the parents to either gift their children the funds for a down payment or buy the house outright and put their children on the deed. With significant assets themselves, parents are hoping to avoid the tax consequences of having the assets in their name. 

Whether the property is sold, or simply “deemed disposed” on the death of the parents, the gain must be recognized and included in income, since it is not the parents’ principal residence. Further, if it is in the parents’ hands, it would be subject to probate on death.

However, it is important not to let the tax tail wag the rest of the dog. There may be some serious, unintended outcomes if, in trying to minimize the tax implications of the purchases, other issues are not given due consideration.

Happily ever after…hopefully

Firstly, consideration needs to be given to what happens if the adult child is single at the time of purchase, subsequently forms a relationship, legally marries, and the couple lives in the house but ultimately the relationship breaks down.

In Ontario, the “matrimonial home” would be included in family property and the full value of the home, not just appreciation since the marriage, would have to be shared with the spouse. Common-law couples are not entitled to the same equalization of family property. In this instance, parents might be well-served to stop pressuring their kids to settle down and get married! 

One way to address this issue is to lend your child the down payment or funds to purchase the house using a demand loan that would be forgivable on death. The debt, as well as the asset, would both be included in the determination of the property to be equalized. While the spouse would share in the price appreciation of the property, the initial sum provided to your child to acquire the home would likely be protected. 

The parents may feel some comfort using this approach if they are concerned about their own cash flow down the road if, for example, long-term care or in-home help was more costly than anticipated or was needed for a much longer period than planned. They could call on the loan when, presumably, their children would be older and in a more stable financial situation.

Siblings for life

Further complications can arise if a property is purchased for siblings to share. The siblings may have different ideas as to how costs should be shared. Some questions to ponder include:

  • If their incomes are disparate, will the share of expenses be equal or proportionate to income?
  • If both are single when the property is purchased, living together may be harmonious but if one becomes involved with a partner, the sibling relationship could become strained if the significant other overstays their welcome.
  • If one is ready to leave the property before the other, will the remaining sibling (be able to) buy the other out? 

To ensure your kids can still sit at Thanksgiving dinner together and will be in touch after you pass, it’s best to come to an understanding about how these issues will be addressed before they arise.

Cottage life

These questions are very similar to issues of succession of the family cottage. We have a case study on our website about the use of life insurance and a formal sharing agreement to preserve a cherished family asset for future generations. 

Trusts are often used as a means of providing children with a property without putting the financial responsibility of ownership in their hands. Use of trust also provides creditor protection for the property and, if structured properly, may prevent the property from being considered a marital property asset.

We have a detailed educational article regarding cottage succession that discusses trusts and other tools that we are happy to share upon request.

No matter the financial question you are grappling with, reach out to your wealth advisor for advice – true wealth accumulation is about more than investment selection.

If you have questions about intergenerational wealth management strategies, you can reach me at Joelle.Hall@RichardsonWealth.com

This article is supplied by Joelle Hall of Hall O’Brien Wealth Counsel, Director, Wealth Management, Portfolio Manager and Investment Advisor with Richardson Wealth. 

Hall O’Brien Wealth Counsel specialize in tax-efficient portfolios and planning. We speak your language so you feel confident in the plan we implement together.

www.HallOBrienWealth.com 

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.

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