The wisdom and worry of “living inheritances”

My late wife didn’t see how our kids invested their inheritances. But I have, and all three have done Mom and me proud.

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“Living inheritance”. It’s a bit of an oxymoron… like “jumbo shrimp” or “virtual reality”. But it’s a real thing; something I personally believe in and something that’s growing in popularity for a number of reasons.

A living inheritance is exactly what it sounds like. A plan where parents can provide their kids some or all of the financial legacy intended for them, but during their lifetime. After all, why wait until you’re gone to have your children benefit from the wealth you’ve accumulated that you can comfortably (emphasis on “comfortably”) share with them now… when you’re here to enjoy it?

This is something I did with my own children. Each of my three children received $50,000 to do what they wish, as long as it provided long term returns. My oldest put a down payment on a house. Middle child paid for most of his graduate degree. The youngest – still living at home and going to school – banked hers for the future.

My late wife Mary and I arranged this before her (unexpected) passing, and I know that she would take great pride in seeing her kids be so practical with this pretty substantial chunk of cash. It was proof that we taught our kids to be respectful and responsible with money.

That’s why I emphasized the word “comfortably” earlier. If you’re considering a living inheritance, you have to ask the hard questions of whether your own children would spend the money wisely, sit on it, or squander it. Did you bring up financially savvy kids who could handle what they might see as “free money”?

What would your kids do if they were suddenly handed $50,000?

Let me start with what I see as one of the fundamental principles of raising children; one that guided Mary and I before we decided to hand $150,000 of our hard-earned cash to our three kids.

To me, it’s a parent’s job to see that their offspring are financially literate. That’s not because I’m a financial advisor; it’s because I’m a Dad who wants his kids to be smart with their money (or mine, if I give some to them). The subject of money was never taboo in the Dri household; Mary and I created teaching opportunities whenever we could from the time our kids were very young.

The result? Young people who’ve always known the value of a dollar, and made fewer requests from the Bank of Mom and Dad – whether it was to buy a new pair of kicks or a first home.

It’s the old proverb: “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”

Investing that living inheritance into a place to live

I mentioned about my oldest child putting his living inheritance towards a home. That’s a great use (smart kid!), and there’s a new investment tool that can provide a lesson in how to do it right:

If you have been training your kids about money since birth and agree with concept of using a living inheritance as a financial lesson, then you’ll be very interested in the new First Home Savings Account.

What’s a First Home Savings Account (FHSA)

A First Home Savings Account is an investment vehicle proposed by the federal government in the 2022 budget. As of this writing, the FHSA has not yet come into law. Once it launches it means tax-free growth for funds put toward buying a first home.

Here are the basics behind an FHSA:

• Any resident of Canada between the ages of 18 and 40 can open a plan
• They can’t have owned a home in the year the plan was opened or during the past four years
• Contributions are $8,000 per year to a maximum of $40,000 and grow tax-free
• Contributions are tax deductible
• Unused contribution room is not accumulated or carried forward
• Withdraws of contributions and investment gains are tax-free when used to buy a first home
• The plan can remain open for fifteen years
• Any remaining funds can be transferred to a RRSP or a RRIF on a tax-free rollover basis.

What would I recommend your kids do with a living inheritance?

I’m a fairly conservative investor, I like to do things pragmatically in ways that maximize my money. So, assuming your kids aren’t financial mavens, here’s what I’d recommend you do:

A) Offer to put funds into a First Home Savings Account

Once your children (or grandkids) turn 18, make them this offer:

• YOU WILL (as the Bank of Mom and Dad or Grandma/Grandpa) give them $8,000 a year for five years to invest in a FHSA to buy a home before they turn 33 years old.
• THEY WILL (as responsible adults) manage the funds – BUT all buys and sells must be fully researched and given the thumbs up by the Bank of Mom and Dad before any investment can be made.

By contributing to your child’s FHSA, you…

1. teach your kids how to invest
2. transfer up to $40,000 to the next generation with the funds growing tax free for up to 15 years
3. see your kids save up for their first home purchase.

B) Open or top up a Tax Free Savings Account (TFSA)

Beyond a first home, your living inheritance can also be used to top up the children’s Tax free Savings Account. As of 2022, the cumulative limit for TFSA is $81,500 and the annual limit is currently $6,000 per year.

The key difference between a TFSA and FHSA are…

1. TFSA contributions are not tax deductible
2. the plan may remain in the plan for life.

Just like a FHSA, the TFSA teaches kids about money, transfers money to the next generation, and provides funds for future use – for a down payment for a house, or as part of a retirement plan.

Let’s teach your kids to fish — together

I can’t emphasize enough how important it is to have money-smart children – at any age. As they approach adulthood, or even if they’ve been “adulting” for some time, financial education becomes more critical, especially if you’re looking to provide them with a living inheritance or some other form or financial support that requires wise investing.

I suggest a family conversation, one I’d be happy to arrange and conduct. A frank but comfortable discussion (something we’d done countless times at the Dri dinner table) can ultimately put everyone at ease, and send your kids on the right path.

Here’s what my team and I can offer your family:

1. We will remove our minimum investment balance so children and grandchildren can open a TFSA and FHSA with any amount.
2. We will charge the kids the same low wealth management fee we charge Mom and Dad regardless of how much they invest
3. We will provide your children with a financial plan that includes a review of:
   • Their employer health benefits and savings plans
   • Tax minimization strategies
   • Debt reduction strategies
   • Methods of savings for education expenses
   • Their life and disability plans
   • Their wills and Powers of Attorney
4. We will start a family discussion to ensure a successful transition from one generation to the next.

We can also discuss the merits of a living inheritance, and establish the reasons for and the expectations of the gift. Yes, ‘living inheritance” might seem like an oxymoron. But what should never be an oxymoron is the phrase “financially literate kids”.

Let’s talk!

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