Every generation experiences money-related challenges, but with soaring housing prices, mounting student debt and an unforgiving job market, many young Canadians are feeling the strain. The impacts of these financial headwinds could be spilling into family life, with nearly a quarter of Millennials and Gen Z adults saying they can’t afford to have children.
The estimated $1 trillion that’s expected to flow from baby boomers to the next generations via the Great Wealth Transfer will help down the road, but many younger Canadians say they need help now. That’s causing some families to rethink the traditional approach to inheritance. Instead of wealth flowing to the next-youngest generation, some families are passing their money down to the third generation instead.
“Grandparents are actually skipping generation two and going right to generation three with wealth,” says Brodie Taylor, Director of Tax Planning at BMO Private Wealth. “I’m not saying ‘write their kids out of Wills,’ but they understand the benefit of supporting the grandkids more than the children at this stage.”
A shift in thinking
Increasingly, that transfer is happening while the older generation is still alive. A recent BMO survey found that nearly half of parents and grandparents plan to provide financial support in the next year to their adult children and grandchildren, helping with everything from daily costs to big-ticket expenses like education, childcare and housing.
And the younger generation isn’t shy about receiving it. One in five Gen Z and Millennials say they’ve already either been given some or all their inheritance or expect to receive their share of the family wealth while their parents are still alive.
Taylor, who works with families that have $2 million to over $1 billion in assets, says this is an issue that’s affecting everyone across the wealth spectrum.
When and how to help
Early support, however, comes with its own set of challenges, including whether giving too much too soon could remove the motivation to work and build their wealth independently. “There’s always a cautionary tale that if you set someone up with a lot of things, you may alter their trajectory in life of what they otherwise would have done,” says Taylor.
It’s a common worry for parents and grandparents with wealth to share. How do you help without removing the drive to succeed? The answer often lies in rethinking not just how much to give, but when.
The traditional approach was straightforward. “The norm was Gen 1 is going to go to Gen 2, and sometimes Gen 1 felt that it was Gen 2’s responsibility to support their children through their own wealth,” says Taylor. But that model assumed each generation would face similar economic conditions.
Although the worry about giving too soon remains, families are weighing that against the risk of missing the window when help matters most. To balance those concerns out, some families are exploring other ways to support younger family members, such as providing targeted help to assist with things like a home down payment, tuition fees or even seed money to start up a business.
Many grandparents are now giving funds earlier to help younger family members get to a better place while they can, offering guidance with financial decisions, says Taylor. Often the guidance comes through family meetings to ensure everyone is on the same page and shares the same values. Not only does it set the younger generation up for success, but it also gives the older generation some peace of mind. Giving earlier giving allows grandparents to see how that money is put to use and enjoy the results.
Building in guardrails
For families concerned about giving too much at once, there are ways to structure support while maintaining oversight. Taylor says that some families are giving cash gifts to adult children and grandchildren to put towards their Tax-Free Savings Account (TFSA).
This strategy can be helpful for some families on a few levels. For starters, since cash gifts aren’t taxed in Canada, giving some money now provides a way to manage a potentially large tax bill if they wait for the wealth to pass on through their estate. At the same time, some families see TFSAs as a useful teaching tool to help their children or grandchildren get acclimated to investing.
“Funding a TFSA allows parents to help their adult child maximize that account, while teaching them the ins and outs of investing and what it means to hold a stock or a bond,” Taylor says.
Trusts offer another approach that allows parents or grandparents to retain more control over the money, so they can gauge the impact of distributions and scale them back or up, as necessary. “Rather than a child inheriting an outright sum of money, there’s a bit more protection around that,” he explains. This might include phased distributions over time or the children having to meet specific conditions for accessing larger amounts.
Just note that before you gift money, it’s important to plan for all the consequences and potential unforeseen events that could put that wealth at risk. For instance, while cash gifts may not be taxable, if you’re planning to sell an asset with a capital gain to access that cash, it could trigger a taxable event in your hands.
Likewise, if you’re gifting to help with a downpayment on a home with their new spouse, your gift could be at risk if that marriage ever breaks down, which is why it’s important to important to find the right strategy before you offer your support.
Financial literacy first
Whatever the approach, Taylor emphasizes that the next generation needs to know how to manage money before dollars change hands. This can start with a family meeting, where financial literacy becomes a focus of the conversation. Often, a wealth advisor can facilitate these discussions.
One tactic Taylor suggests for older kids and young adults, is to get them to set up a practice investment account, which offers a risk-free way to play around and get an understanding of investing.
There’s no universal formula, he says. The right approach depends on family dynamics, the amount of wealth involved and individual circumstances. But some principles hold true: start money conversations early; prioritize financial education; consider gradual support over large lump sums; and build in accountability.
“Making smaller gifts allows you to gage the impact and the direction that the children take with those gifts,” says Taylor. “At the end of the day, it all starts with financial literacy.”
