Annually, I try to write an article or two to encourage parents to help teach financial literacy to their children. This is such an important topic and, in my opinion, does not occupy enough of the school curriculum. Last year’s article, The Gift of Financial Literacy, is a good refresher.
This year, the theme of my article is focused around The Three Little Pigs. The original story, about three little pigs who are sent out into the world to build their own life and fortune, is 169 years old and has been adapted numerous times over the years.
The version that I am familiar with has three pigs each building a house. The first pig, whom we will refer to as Dion, builds a house made out of straw. The second pig — let’s call him Gabriel — builds a house made out of sticks. The third pig, Arthur, builds a house made out of bricks. The story also has the big bad wolf.
Everyone gets something different out of stories when they read them. Dion (first pig) and Gabriel (second pig) are more interested in playing and spend very little time building their houses. Arthur (third pig) works very hard to build his house of bricks. There is a strong moral to the story: Hard work pays off. The wolf comes by and blows the first two houses down because they were not built properly. Dion and Gabriel must go to Arthur’s house to avoid being eaten by the wolf.
Financial planning
Before we begin a financial planning meeting, we will already know the details of every immediate family member. We will know the names, birthdates, and location of each child and grandchild. We also discuss whether any parents, children or grandchildren are currently dependent on them for financial support.
In establishing financial goals, we will discuss whether they want to financially assist their adult children in building or purchasing a house. Rarely are our clients’ adult children all in the same situation. Some may be struggling, while other are financially stable. Some may be single, and others have families.
Some may be like Dion and Gabriel and want to just have fun, while others may be like Arthur, who has worked hard. I’ve had some clients who are adamant they want to treat all their children equally. Others feel that they should support the children who need it the most.
My personal approach, one that I have seen work the best, is when financial assistance is provided to adult children who also assist themselves. For example, a child might be looking to purchase a house and needs a 20 per cent down payment. That could mean letting your child know that if they can save enough for a 10 per cent down payment, you will match it.
After over two decades of working with families, we have many stories of how these conversations have unfolded and the resulting outcomes. We share these (without using names) with current clients to assist them in making good financial planning decisions.
The good
Giving money to your children while you are alive can provide some emotional rewards. You can see your adult children become more financially secure and have less debt. Buying a house, starting a business, eliminating student loans, etc. will all help your children get a good financial start in life.
Sometimes, helping them buy a car, assist with day-to-day bills, a plane ticket home, etc. can also help. Shifting funds out of higher tax bracket parents to family members in a lower tax bracket makes for great income splitting — the entire family will be in an overall better situation. This is especially the case if the adult children are responsible with the support provided.
The bad
Our clients who are happy and content have worked hard to build up their net worth have a sense of contentment inside. In my opinion, contentment that results from building something yourself is greater than the contentment from something that is just given to you. This is especially the case the younger the recipient is. I’ve seen situations where a child who was given money is happy for a short while — generally, right after the funds are given — but this happiness doesn’t always stay.
Giving funds to some children does not necessarily bring them long-term happiness. In some cases, adult children may come back expecting more, which some clinets have been very hurt by.
In other situations, we have seen the money spent by adult children on expensive vacations, recreational vehicles, and non-essential luxury items. This also can be hurtful for parents who worked so hard to sacrifice and save the money, especially when they expected the money would be spent to purchase a home or pay down debt.
The ugly
I’ve seen nightmare situations where money was spent the wrong way and created a huge divide in the relationship — it was not the desired outcome. I’ve seen large sums of money disappear quickly, whether it was gambled away, used to purchase addictive substances, or lost in marital breakdowns, by friends taking advantage, or through poor investment choices.
The Greenard Group’s Top 10 questions
So how do you get the best outcome possible? Listed below are some of the primary concerns and questions every parent should ask themselves prior to supporting family members.
1. Will the financial support lessen their children’s work ethic?
2. Will giving adult children money impact their own financial plan?
3. Should they give money to their grandchildren instead of their adult children (for example, funding RESP accounts or university)?
4. When is the best time to give adult children money?
5. Should the financial support be linked to a specific purchase, such as a house?
6. Should the amount transferred be structured as a gift or a loan?
7. How can the money transferred to children be protected in the face of life events such as a death, separation or divorce?
8. Can you control how the money is spent — and how will you react if the funds are not spent as you desired?
9. Should money be provided in stages or in one lump sum?
10. Should gifts be tied to special events such as graduation, birthdays, etc?
The Greenard Group’s 10 Tips
We strongly believe that there is a right way and a wrong way to approach gifting funds to family members. Some of the talking points we highlight are:
1. Lead by example from an early age.
2. Spend time to talk to your children about finances before you gift them funds — if you don’t, no one else will.
3. Communication is key with the underlying intention of the support.
4. Put parameters around financial support if necessary.
5. Protect the capital with promissory notes.
6. Help those who help themselves is one approach we feel works very well.
7. Don’t be in a rush to give money before you feel they will make responsible decisions.
8. Set expectations of whether this is a one-time gift or if future tranches will be gifted.
9. Update your will to accommodate for the gifts made while you are alive.
10. Bring your adult children into a meeting with your Portfolio Manager.
The last point is always well received by our clients who are wanting to help their children get started with financial investments. They are pleased to know that we can assist their adult children with financial guidance, including the opening of investment accounts if applicable. Our article How a Portfolio Manager Helps Families talks about how we can household family accounts together.
There is not a right answer that fits every situation. Every family situation and dynamic is unique. At the risk of sounding like I am stereotyping, I feel that the priorities are shifting in the younger generation.
The younger generation often has a desire to have a greater work-life balance. I feel this is the case because the goal of buying a house may seem so out of reach. What is not out of reach is buying that Starbucks coffee, travelling, going out for a nice lunch, or buying designer clothes. This is often a strong contrast to their parents’ work ethic.
We feel that if parents begin talking to their children earlier, and focus on education, that the two generation can get closer together. Communicating intentions and expectations are key components.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit greenardgroup.com.
