There’s a list of problems that are only created with more money
They say the best time to plan for the future is when things are going well.
Of course, that’s in a perfect world. In today’s world, people are nervous and concerned about their finances, and so we are seeing an increased demand for financial planning. In some ways, this makes perfect sense. If someone’s financial future looks good when things are bad, they can be fairly confident they will be OK under most circumstances.
The increasing demand at our firm is from what most would consider wealthy Canadians, generally those with a net worth of $3 million to $30 million. Now, I can see some eye-rolling and groaning right about now. “What do these rich people have to worry about?” Well, there is an old saying (and a newer song): Mo’ Money, Mo’ Problems.
Some issues and concerns are similar across the wealth spectrum, while others are unique to those with a lot of money. Let’s take a look at one area that would affect the wealthy differently than most, but may be of particular concern at the moment: gifting to children or grandchildren.
Gifting to family is simply not on the agenda for many Canadians. Just like the instructions on the airplane tell you to put safety gear on yourself before helping a child, your financial plan should look after yourself first before seeing if you can help others. But if you are in the position to easily help others, then this is likely a consideration, especially when it comes to real estate.
To look at a fictional example, if you have three middle-aged children and nine grandchildren, ranging in age from five to 25, things can get worrying if gifting to them was part of your planning.
What sometimes happens is that the oldest child is looking to buy a home, and the parents may decide to contribute $200,000 to the down payment. However, the question isn’t how much they can afford to contribute to the oldest child; it is how much they can afford to equally contribute to all three children.
If they can’t afford to gift $600,000 ($200,000 to each child), then they can’t afford to gift $200,000 to the first child. Not all parents will contribute equally to their children, but many will plan to.
Often, the gift to the oldest child will take place several years before the gift to the youngest child. What happens if there is a lot of inflation over that time? Do you gift more than $200,000 to the youngest, given the $200,000 is now worth much less than it was maybe eight years earlier? What if you simply don’t feel you can afford to give that much money today to the youngest? Is there a way to give less?
It can be even harder when it comes to grandchildren. There are nine of them in our example, and a gift of $50,000 can easily be perceived as a $450,000 commitment. Given the 20-year age gap, how will that be managed effectively? What if the first four grandchildren receive this gift and the last five don’t?
Yes, these are first-world problems of the wealthy, but they are real issues. Families can split up over favouritism from parents, and these types of gifting issues can sometimes be the cause of it.
To help manage this process, we encourage families to work out a financial plan that will provide greater insight into their financial future on an annual basis. With this information, they can better plan out potential gifts and see what they truly can or can’t afford. They can also determine which types of accounts or holdings are best used to fund these gifts.
Maybe the result of this planning is to be a little more cautious at the beginning to help ensure an ability to fund gifts in good and bad times. As we say, you can always choose to gift more in the future, but it is tough to get a gift back if you gave too much.
My firm has put together a free report on the 10 key financial planning questions of high-net-worth Canadians, along with some thoughts on how to best answer those questions. Some people will look at these questions and directly relate to them. Others will be in a different place and say they wish they had those problems.
But there are some universal concerns regardless of wealth. These relate to making sure you and a partner will be OK, trying to make the most of what you have and how you can best help the larger family.
That core is the same, but there’s definitely a list of problems that are only created with more money, and there needs to be some good planning to deal with them, especially in this environment.
Reproduced from Financial Post, October 5, 2022 .