Ted Rechtshaffen
March 20, 2024
Financially helping adult children is a big topic amongst our clients, and it can range from helping them keep their heads above water and a roof over their heads to helping them to buy a house, as well as gifting in your lifetime rather than letting the kids wait for an inheritance upon death.
Here are three broad areas of financial support and some things to think about.
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Financial lifeline
Whether it is a desperate need or to keep a child in good financial standing, a key question is how much can you afford to help? Is this help for a short period to get over a difficult period, or is this longer-term support? Philosophically, as a parent, is this help a loan or a gift? Is it conditional on certain behaviours? Is it a gift with a hard limit? Is this a gift that is properly appreciated or something that is expected?
At the end of the day, money sometimes makes for the most complicated gifts because they speak to the role of the parent as a child’s provider and protector. Ideally, a child becomes fully independent in their 20s and the parents’ role in this area becomes fully optional as opposed to something that is needed or expected.
Each situation is different, but we generally review whether our clients can afford to help their children without financially causing themselves real discomfort. Secondly, it’s important to formally communicate that this type of gifting is short term or will be weaned off over a period of time — essentially to communicate that this is not a long-term plan and that the child needs to figure out how to get by without these funds.
There may be cases where this is a permanent scenario, and it is even more important in those cases for the parents to build it into their long-term financial plan and plan for possible ongoing financial support after they are gone.
Real estate
A real estate gift starts with an honest review of the parents’ financial situation. Part of this review is to remind the parents that if they have three children and can help the first with $150,000, they really need to budget for $450,000 of gifts. This can be the case even if one child is financially in very good shape since it can sometimes get into issues of “mom always loved you better than me.”
To help determine if the parents can actually afford $450,000, or any target number, it is really important to make a financial plan. As a start, you can use our My Estate Value calculator to figure out your situation using numbers with and without gifting to see what your likely estate value would be in each situation.
Once you have a sense of what you can comfortably afford to gift, the next issue is how best to gift money in a way that will go towards helping your child, and not risk going to others. If the child is single and buying a house on their own, it can be simpler to make the gift as there isn’t an existing spouse or partner to consider.
Having said this, if they do live with a partner down the line, they should be careful to sign a proper cohabitation or marriage agreement stating the house is owned by your child and the partner is excluded from any family property going forward.
The gift becomes trickier when your child is already married or has a partner. Let’s say you gift $300,000 as a down payment for a $1.5-million house. Six months later, they split up. Without a proper structure, your child’s ex-partner will own $150,000 of your gift.
One way to avoid this is to set up the gift as a loan. If it is a real loan, it would have real interest rates and real payments. Long ago, you might have set up a forgivable loan with no interest payments, but courts have successfully challenged whether it was ever intended as a loan. If set up as a proper loan, then in the event of a relationship breakup, the loan could be called and it wouldn’t be considered part of a family asset.
If it truly is a gift, then there is always some risk of the gift being considered a family asset. One of the ways to mitigate this risk is to make the gift alongside a proper legal agreement that acknowledges this gift is meant to be excluded from the joint family assets. It isn’t perfect, but can certainly help.
Early inheritance
We often have older clients who are able to fully split income for tax purposes. However, if they have meaningful assets and one partner dies, the survivor often ends up with a much larger taxable income and a much larger tax bill. It is at this point it can be of value to gift some money to your beneficiaries.
The benefits might include allowing you to lower your tax bill and collect full Old Age Security, as well as moving you into a lower marginal tax bracket. Another benefit is that there is no probate fee on the gifts, but there would be in most provinces if the assets are part of an estate. In Ontario this can be as high as 1.5 per cent.
Another benefit is that you are alive to see the gift, and that your children may be more in need of the funds today than in several years through an estate.
Of course, the risk is always whether you can afford to make this gift in the first place. With decent planning and understanding of your future estate value, you should have some confidence in how much of a gift you can truly make.
Gifting to an adult can sometimes make a lot of sense, but just be sure you have done your homework before putting a bow on it.
