Passing on Wealth to the Next Generation

It is projected that over $1 trillion in assets will be transferred from older to younger generations in Canada, over the ten-year period from 2016-2026. [Jump to this section]
Many have not yet had a conversation with their heirs about inheritance. [Jump to this section]
In order to successfully plan your inheritance, you should factor in your own financial requirements for retirement, as well as the expectations and lifestyle of your beneficiaries. [Jump to this section]
Planning ahead may help to maximize your financial assets through account structure and tax planning so that there is more wealth for your heirs. [Jump to this section]
Private investments are an increasingly popular option to potentially boost the value of your inheritance. [Jump to this section]
There may be advantages to bequeathing your inheritance proactively, rather than upon death. [Jump to this section]
When talking about inheritance with your loved ones, keep the conversation practical and productive. [Jump to this section]

Introduction

Currently, In 2018, Toronto-based research firm Strategic Insights projected that this transfer would approximate $1 trillion over 2016-2026, with roughly 70% of the transferred wealth in the form of financial assets.¹ Baby Boomers will be bestowing houses, rental properties, family cottages, trusts, companies, and cash gifts to their heirs, notably the Gen X and millennial generations.

This prediction is echoed south of the border as well, with U.S. research firm Cerulli Associates projecting that the American Baby Boomer generation would transfer approximately $48 trillion to younger generations over a 25-year period (2018-2043).²

Those who are participating in this great shift of wealth should consider that the expectations surrounding financial management and investment will likely differ greatly between older and younger generations, notably millennials who have grown up with digital technology and the internet.

Planning an inheritance: open conversation is crucial

For older generations who are now planning to transfer their assets to their children and/or grandchildren, open communication will likely be key in ensuring that their loved ones are empowered to maintain and make the best possible use of their inheritance.

However, according to a 2018 Environics poll, most people aren’t in a hurry to have a conversation with their heirs about their inheritance.³

Of the 400 Canadians with at least $500,000 in investable assets surveyed:

58% of respondents had not discussed instructions for their estate with their heirs.
Only 19% had introduced their children to a financial advisor.
12% did not plan to talk about their inheritance plan at all with their beneficiaries.
13% had not spoken openly to their spouse about their estate plans.

Not everyone is comfortable planning and discussing what happens when they pass away, but if you do so, you’ll be gifting peace of mind to both yourself and your loved ones.

With your affairs in order, you can help to ensure that your family won’t need to experience the added stress that comes with confusion or disagreement over carrying out your wishes, while also contending with grief.

Passing on wealth to loved ones: what to consider

Prudent inheritance planning is an important first step to successfully transferring wealth to your loved ones so that no one is left wondering what your intentions might have been. Creating a will is one of the most important steps you can take in this planning, but it should not be the only step. Discussing your inheritance plans with your loved ones helps to ensure that you are able to articulate your wishes personally to them, with the added benefit of listening to their response.

Some of the following points may help you start discussions with loved ones or help you to fine tune your estate planning:

Your planned retirement date, if you are not yet retired.
The amount of funds/target income you will need for retirement. This amount is likely more than you think and is best determined through a discussion with a trusted financial advisor.
Your life expectancy. Although it’s not possible to determine with certainty, an average will be helpful. For example, using a 2007-2009 reference period, Statistics Canada determines that a 65-year-old Canadian will live another 20.2 years on average.⁴
How much control you wish to retain regarding the assets you bestow. For example, gifts within trust and company structures may allow for more control, but also may be subject to added complexity and taxation.⁵ In contrast, gifting cash relinquishes control over that gift’s use.
Plans for charitable donation. You may choose to make a planned donation, set up a foundation, or name a charity as a beneficiary. It will be important to consider if you will be donating a portion of your finances to a charitable cause, and to be transparent with your heirs about these plans.

Maximizing your assets as a component of inheritance planning

Below are some factors to carefully consider when choosing your investment strategy now, while also maximizing returns for your own retirement and ultimately the transfer of wealth to your family.

Risk management. Liquidity, diversification, calculated risk-taking, and required rate of return are key factors when assessing what to invest into.⁶ Your investment risk tolerance may change throughout the stages and milestones of your life. In retirement, you may want to strike a balance between minimizing and diversifying your risk while also achieving returns that satisfy or exceed your post-retirement financial goals (including your planned financial gifts and bequeathment of assets).
Inflation. According to Forbes.com, “While inflation typically only slightly increases the cost of goods and services from year to year, it represents a serious risk and challenge for retirement income planning, as its impact is magnified over an extended period of time.”⁷ Because of this, it may be worth considering passing on wealth sooner rather than later, to help children/grandchildren get a more impactful kick-start. Contributing to an RESP, helping to start an investment account, or gifting funds towards the purchase of a home are some ways parents and grandparents may utilize wealth that has been allocated toward inheritance. Read on to find out more about the timing of your inheritance.
Tax strategy. Working with a trusted financial advisor to determine your net assets, net worth, and future financial goals is a great starting point in reviewing where and how your assets are held and taxed. Once this starting point is established, you can begin to review registered accounts, such as RRSPs/RRIFs and TFSAs, and confirm who your successor annuitant or beneficiaries are for those accounts. In many cases, spouses opt to transfer their registered funds to the surviving spouse as a way to minimize tax at the time of death, but this transfer is not mandatory. Charitable donations are an increasingly popular option for many who are looking for ways to reduce the amount of tax their estate will need to pay. Additionally, gifting financial assets to children or grandchildren for their own use or investment may be another option to proactively minimize taxes, as financial gifts of any value are not taxable (however, if you are gifting hard assets such as property, you will be subject to taxation for those assets).^{8, 9}

Opportunities for investment growth might be hidden in plain sight

Some types of investment opportunities are often overlooked but may offer real advantages in growing your investment portfolio to prepare for retirement and inheritance. Alternative private investments, such as private real estate investment trusts (REITs) and private equity growth funds, can potentially offer steady and above-average returns. They are generally offered exclusively to investors who meet certain accreditation or eligibility.

Private investments may offer the ability to “park” your hard-earned funds for the long term and receive passive monthly cash flow while watching your investment grow. Some also allow you the option to re-invest all, or a portion of, your distributions back into the fund. It’s important to do your due diligence with any private investment and gain an understanding of how it operates and its past performance.

With millennials making up a component of the generations set to inherit baby boomers’ wealth, sustainable investments and Environmental, Social, Governance (ESG) funds should be taken into consideration as well. Younger generations are seeking out socially responsible investments that not only provide the potential for portfolio growth, but operate in ways that minimize or eliminate practices that may be seen as unethical or environmentally damaging, such as contribution to greenhouse gas emissions causing climate change.

Maclean’s reports that the millennial generation is demanding ESG investments, citing a global survey by deVere Group that found 77% of millennials prioritize ESG investments over other investment types.¹⁰

With the Canadian government’s strengthened climate plan, “A Healthy Environment And A Healthy Economy,” released in late 2020 and accompanied by a $15 billion initial investment,¹¹ we believe the stage is set for clean energy funds and other sustainable investments to take advantage of more funding for clean energy infrastructure and jobs in the cleantech sector.

We believe the time to be looking at these types of investments is now, and the generations to which you pass on your wealth will likely appreciate your dedication to preserving their quality of life by choosing to invest sustainably.

Transferring wealth proactively vs. upon death

Consider the timing of your bequeathment. Not everyone chooses to pass on their assets only upon death. In some cases, proactive wealth transfer—the gifting of money and assets while a parent or grandparent is still alive—may be the most sensible option.

Examples include gifting cash for your grandchild’s university tuition expenses, or aiding in the down payment of your child’s first home. These types of events may happen well before you pass away.

Proactive wealth transfer has the added benefit of allowing you to see the fruits of your hard-earned dollars by participating in the enjoyment of your financial gift alongside your family members.

Keep in mind the lifestyle and preferences of your heirs as well. Will they want to manage the rental property you’re planning to bequeath them, or does it make more sense to sell the property and invest the proceeds? Be aware that tax strategy plays into these decisions, with the potential of paying capital gains on the sale of a rental property or secondary residence, such as a cottage.¹²

Having the conversation

Starting the conversation about inheritance with your children or grandchildren may arguably be the most difficult part of inheritance planning. Ongoing open and constructive dialogue will help to ensure all parties’ best interests and intentions are considered and kept at the forefront of such discussions and planning sessions.

You may approach the conversation as an opportunity to pass on the most important saving, spending, and investment knowledge that allowed you the ability to accumulate, and then bestow, your own wealth. Perhaps this is knowledge you had to learn the hard way yourself, which means that passing it on will be all the more advantageous to your loved ones, so they can avoid the same bumps in the road.

You may choose to discuss:

Your children/grandchildren’s personal/financial goals and major life milestones
Investment in hard/tangible assets (i.e. houses, rental properties, art) vs. liquid assets (i.e. stocks, bonds, private investments, etc.).
Investment in public market securities vs. private alternative investments
Real estate property ownership/management vs. passive real estate investments, such as REITs structuring of assets and financial accounts to avoid taxation as much as possible

Prudent use of proceeds from inheritance may include:

Investing to grow liquid and investable assets
Eliminating burdensome (bad) debt
Saving for an education or home down payment
Making improvements that add to the value of a home/property

You may also choose to introduce your heirs to your trusted financial advisor. As previously noted, Environics reported that only 19% of respondents had introduced their children to a financial advisor. However, in the same poll, 40% of respondents wanted their heirs to have the same financial advisor that they have to help manage their wealth.⁹

Even if this turns out not to be the case for your family, introducing your loved ones to the experience and potential benefits of a dedicated advisor will at least give them a basis of comparison to other types of financial management including self-advising and robo-advising.

Communicating openly with your heirs and closely including them during your inheritance planning is beneficial for both parties. Discussing your plans for transferring your wealth will likely inform and motivate them to take another look at their own financial and family goals, knowing that they, too, will be passing on their own wealth someday.

With sound knowledge of how your financial assets will be distributed, and an understanding of how you can optimize your wealth now so that your heirs can put them to the best possible use, planning to bequeath your wealth no longer needs to be a dreaded task. Rather, it can be an enjoyable process and a potential opportunity to provide your family with valuable financial insight that they can pass on to their own successors.

About the Author

Ray Punn
Vice President, Wealth Solutions
Skyline Wealth Management

Ray Punn is an experienced leader in management across the public and private sectors, including the Financial, Automotive, and Private Equity industries. As Vice President of Skyline Wealth Management, he leads a comprehensive team of Advisors, and oversees business operations, marketing, investment management, and investor relations. With a deep understanding of how each component of wealth management contributes to an exceptional investor experience, Ray and his teams focus on building long-term partnerships with Skyline Wealth Management’s valued investors.

Footnotes

¹ Investment Planning Council. “Affluent Canadians are worried about wealth transfer.” CISION, https://www.newswire.ca/news-releases/affluent-canadians-are-worried-about-wealth-transfer-671751984.html. Accessed 10 May 2021.

² “The Great Wealth Transfer.” Cerulli Associates, https://info.cerulli.com/HNW-Transfer-of-Wealth-Cerulli.html. Accessed 10 May 2021.

³ “Environics Research Survey Shows Affluent Canadians Are Worried About Wealth Transfer.” Environics Research, https://environics.ca/study-release/environics-research-survey-shows-affluent-canadians-are-worried-about-wealth-transfer/. Accessed 10 May 2021.

⁴ “Archived – Life expectancy at birth and at age 65, by province and territory, three-year average (reference period 2007-2009).” Statistics Canada, https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1310040901&pickMembers%5B0%5D=3.1&cubeTimeFrame.startYear=2007+%2F+2009&cubeTimeFrame.endYear=2007+%2F+2009&referencePeriods=20070101%2C20070101. Accessed 10 May 2021.

⁵ This article should not be construed as tax advice. Readers are advised to consult with their own professional tax advisor.

⁶ Anspach, Dana. “How to Manage Investment Risk in Retirement.” The Balance, https://www.thebalance.com/retiree-manage-investment-risk-2388542. Accessed 10 May 2021.

⁷ Hopkins, Jamie. “How To Mitigate Inflation Risk in a Retirement Income Plan.” Forbes.com, https://www.forbes.com/sites/jamiehopkins/2014/03/30/how-to-mitigate-inflation-risk-in-a-retirement-income-plan/?sh=f270e8740c3e. Accessed 8 June 2021.

8 Bouw, Brenda. “Millenials are demanding responsible investments, and big finance is listening.” Maclean’s, https://www.macleans.ca/economy/money-economy/millennials-socially-responsible-investing/. Accessed 10 May 2021.

⁹ Golombek, Jamie. “The Dos and Don’ts of Tax-Free Gifts in Canada.” Financial Post, https://financialpost.com/personal-finance/taxes/jamie-golombek-the-dos-and-donts-of-tax-free-gifts-in-canada. Accessed 8 June 2021.

¹⁰ This article should not be construed as tax advice. Readers are advised to consult with their own professional tax advisor.

¹¹“Prime Minister announces Canada’s strengthened climate plan to protect the environment, create jobs, and support communities.” Government of Canada, https://pm.gc.ca/en/news/news-releases/2020/12/11/prime-minister-announces-canadas-strengthened-climate-plan-protect. Accessed 10 May 2021.

¹² Investment Planning Council. “Affluent Canadians are worried about wealth transfer.” CISION, https://www.newswire.ca/news-releases/affluent-canadians-are-worried-about-wealth-transfer-671751984.html. Accessed 10 May 2021.

¹³ This article should not be construed as tax advice. Readers are advised to consult with their own professional tax advisor.

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