Marjo Johne highlights that Canada’s wealth transfer, projected to surpass $1.6 trillion by 2030, is expected to take place mostly after the current wealth holders have passed on. However, enabling the younger generation to start utilizing their inheritance while their parents are still around can help tackle one of the major issues: the inadequately prepared recipients anticipating the substantial amounts expected to come their way. Cindy Radu, a family wealth transition expert based in Calgary, points to an “epidemic” of heirs who are deficient in both emotional readiness and financial knowledge.
“It’s essential for families to explore ways of altering this perspective,” she asserts. Numerous affluent parents already share their wealth with their adult children through various gifts, including down payments for homes or initial funding for ventures. Some take it a step further by progressively giving their children portions of their assets to acclimate them to the responsibilities associated with wealth.
For parents, this also serves as an opportunity to observe how their grown children manage substantial funds, allowing for potential amendments to estate plans if necessary. For example, a child who demonstrates reckless spending might ultimately be set to receive their inheritance in trust. Thuy Lam, a money coach and certified financial planner at Objective Financial Partners Inc. in Markham, Ontario, stresses the importance of transparent discussions about finances to mitigate the risk of children “going wild” with their inheritance. “They wish to avoid mismanaging the money,” she explains, noting that fostering financial responsibility is akin to building a muscle. Nancy Marshall, managing consultant and head of family office solutions at Toronto-based Prime Quadrant Corp., shares how one family permitted their adult children to manage a specific amount of capital while retaining the income generated from it, thereby learning about income production and taxation.
She adds, “Starting with a small amount of capital is advisable.” Jason Heath, a certified financial planner and managing director at Objective Financial Partners, recommends distributing money in segments throughout the year rather than granting continuous access to the family fund.
Challenges of Canada’s upcoming wealth transfer
This strategy allows recipients to practice making decisions with significant sums while parents provide guidance throughout the process. “My constant advice is to give a portion you can afford, re-assess in a few years, and evaluate where they stand,” he states. Heath also provides insights on tax-efficient gifting strategies, recommending directing funds into children’s tax-free savings accounts or registered retirement savings plans.
Communication is key in these transfers across generations. A survey conducted by Ipsos for Sun Life Financial Inc. showed that millennial inheritors anticipated receiving, on average, $309,000 from their parents. In contrast, the parents intended to pass down an average of $940,000.
Discussions about family values and the history of wealth can aid the next generation in comprehending their parents’ choices and minimizing disputes. “We collaborated with one family that was very particular about how certain aspects of their finances were structured. The kids recognized it but lacked understanding of the reasons behind those choices,” Marshall recounts.
She offers an example where the children were unaware that an uncle had squandered millions due to a poor financial structure. Heath suggests that the commencement of the family bank can serve as an opportune moment to familiarize children with their parents’ professional advisory team, including financial advisors, portfolio managers, accountants, and attorneys. An Environics survey indicated that over 80% of affluent Canadians have not introduced their children to their financial advisors or involved them in planning discussions.
Advisors can take the initiative to connect with the next generation to foster relationships. It’s beneficial—for advisors, their clients, and the younger generation—to cultivate family connections early and motivate clients to include their adult children in these discussions,” Heath emphasizes.
By nurturing financial literacy and accountability from an early age, wealth owners can ensure a smoother transition for those who will inherit.
