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This article, written by Deanne Gage, was originally published on The Globe and Mail on October 17, 2023, and features insights from Aaron Hector, Private Wealth Advisor.
With the high cost of raising a child today, more grandparents are stepping in to assume some of the big expenses and, in some cases, bypassing adult kids to leave inherited assets to grandchildren instead, advisors say.
Helping grandkids financially may start simply by contributing some money toward education savings, for example, says Aaron Hector, private wealth advisor and certified financial planner at CWB Wealth Management in Calgary.
“I see that fairly frequently as a way to help out parents from that savings burden,” he says.
With registered education savings plans (RESPs), Mr. Hector has seen two popular options. They either contribute $2,500 a year, the optimal amount needed to receive an additional $500 in Canada Education Savings Grant. Alternatively, in rare cases in which they have the means, they could contribute the $50,000 lifetime maximum amount in one swoop in an attempt to grow the assets more quickly.
“The idea is for these younger generations to at least have a start and come out of school without carrying much debt,” says Brianne Gardner, financial advisor and co-founder of Velocity Investment Partners at Raymond James Ltd. in Vancouver.
“That compounding growth you get over time is more beneficial in the long run if you have the means to do that.”
Below are some other ideas in which grandparents can help their grandkids financially if they have the means and wherewithal.
- Tax-free savings account (TFSA)
Some grandparents start contributing to a TFSA for their grandkids the year they turn 18. While lifetime contributions are currently at $88,000 for every adult who was over 18 years of age in 2009, an 18-year-old can only contribute the amount allowed for this year – $6,500 – and build from that as they get older. For 2024, the TFSA contribution room increases to $7,000, Mr. Hector notes.
- Tax-free first home savings account (FHSA)
New this year, the purpose of a FHSA, as the name implies, is an account for first-time homebuyers to save up for a house. The FHSA has a $40,000 lifetime limit that is tax-free and a person can contribute an annual contribution limit of up to $8,000 a year. Similar to a TFSA, any gains on the investments grow tax-free as long as they are eventually used to buy a qualifying home.
Ms. Gardner says her clients are using the FHSA to start building up their grandkids’ nest eggs.
“When you think of the compounding and growth that you get in that account, you’re setting them up early for potential retirement,” she says.
Mr. Hector notes that grandparents are acutely aware that it will be a challenge for their grandkids to break into the housing market.
“If the grandparents have the means to do it, quite often, they’re very willing to have that discussion,” he says.
- Lump-sum cash
Some grandparents have parked cash in high-interest savings accounts and money market funds, and it’s earmarked to help out older grandkids with savings toward purchasing a home or paying down the mortgage.
Ms. Gardner reviews the grandparents’ financial plan to ensure such a gift is feasible and not going to affect their own retirement funds. She points out there are also risks in gifting large amounts of money, as the grandchild might spend it recklessly or not how the grandparent intended. She suggests the grandparent work with a lawyer on a promissory note to cover all the bases, such as what happens to the money should the grandchild separate or divorce their spouse.
“The wording can say, ‘We loaned you that money and can get that money back if there is a separation down the road,’” she says.
Mr. Hector advises the grandparent to include a letter with the gift along with a sit-down conversation that explains the hope of what the grandchild might do with the money.
- Whole life insurance policies
If a grandparent has a paid-up whole life insurance policy with the parents insured and the grandkids as beneficiaries, they are shifting the income from those investments from a taxable account into a government approved tax shelter, Ms. Gardner says.
“This money then bypasses two sets of probate with the proceeds and growth in the policy paid out tax-free to the grandkids,” she says.
“The benefit is multiplied for the next generation and it’s creating and leaving a legacy and helping them set up for down the road.”
- Through wills
Leaving assets to grandchildren through a will allows the client to defer tax consequences, says Kevin Burkett, tax partner at Burkett & Co. Chartered Professional Accountants in Victoria.
Assets will have a deemed disposition upon death, so the idea is to transfer the assets in a way that skips a generation to someone who may pay less taxes, he notes.
“If the grandparents have substantial cash and investments, those grandchildren may be in lower tax brackets,” he says. “Giving to the parents may result in them paying higher tax rates on the income those investments generate during their lifetimes, in addition to taxes that arise on the parents’ death.”
Going the will route may be safer in preventing family squabbles that early inheritances can cause. Mr. Hector admits that he personally would feel uncomfortable with his young kids receiving a substantial inheritance too early because it may not mesh with his own parenting philosophy.
“It’s important that the grandparents discuss with their adult children first before just going ahead and giving the money [to their grandkids],” he says. “To prevent family frictions, you should get buy-in from everyone.”
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability or its contents or for any consequences arising from its use.