When her clients wanted to set up a trust to fund their grandchildren’s education and any future health concerns, Gluskin Sheff’s vice-president of wealth planning, Jag Gandhi, applauded them. Then she encouraged them to dig deeper – not into their pocketbooks, but into the fine print. What did they mean by education? Was something other than a college or university acceptable? What counts as a health concern?
Conditional inheritances are popular. They can be effective and gratifying ways to give a financial gift, but the details are important and there can be downsides.
Just how common is it to give an inheritance with strings attached? According to a 2017 CIBC poll, 50 per cent of parents want a say in how financial gifts to their children are used.
“It’s very, very common,” says Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management in Toronto. The most popular condition attached to an inheritance is age, and Golombek says it’s also typical for money to be unlocked in stages, where some funds become accessible at age 20 or 25, and the final portion comes a decade later.
An age-based gift is simple and sensible, says Andrew Jeffery, director of client services at Northwood Family Office in Toronto.
“We often find that if you use ‘coming of age’ as the primary condition of inheritance, you’re ensuring that people are ready to receive the capital and that they have already forged their own sort of path and identity,” says Jeffery. “And this often increases the likelihood that they’ll be good stewards of the family wealth.”
Other common strings attached include milestone life events, such as reaching an educational goal or buying a first home.
Don’t give your trustee a headache
When it comes to the execution of a gift, a trust is generally recommended. Trusts are flexible and they’re overseen by trustees who can help ensure the funds are doled out as the donor intended, as long as those conditions don’t run afoul of public policy. (You can’t set immoral or harmful conditions, for instance, or encourage acts that can hurt society in general.)
The best way to avoid giving your trustees a headache is to abide by the law and be as specific as possible with terms and conditions.
Gandhi’s clients who left their grandkids an education fund were setting a good example.
“We spent a considerable amount of time defining what the client considered education and health concerns, so that it was properly described in the will,” she says. “This is to make sure there’s no confusion on interpretation for the trustees.”
Ultimately, you want to try and raise your children so their actions are a result of the values that you have instilled in them, not because they’re responding to financial incentives.Andrew Jeffery, Northwood Family Office
Sometimes families find unique ways to use financial gifts to incentivize desired behaviour. Jeffery said some families create an informal “family bank,” where family members can seek funding for entrepreneurial endeavors.
“It’s a way for families to prepare and train the next generation and promote good, sound financial practices,” he says.
Such banks often have unique criteria, Jeffery says, but “often family members would need to submit a business plan and perhaps they would need to present it and defend it before the family bank provides an investment or a loan to that individual. In an ongoing capacity, there could be criteria where perhaps they need to provide financial statements, updates on how the business is performing, or even repay the loan in the future.”
Lower your taxes
Golombek says he has also recommended a matching incentive trust to clients, though that strategy is not commonly used. In this scenario, children have to demonstrate they’ve earned income of their own and the trust would match the earnings, or sometimes multiply them.
“Some very wealthy families are worried that if they leave their children large amounts of money, the kids will stop working, they won’t be motivated, and they’ll just start living off their parent’s inheritance,” says Golombek.
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Sometimes, the conditions on the funds are less surprising than the recipients designated to receive them. Gandhi says it’s increasingly common for “sandwich generation” adults to establish trust funds to care for both their children and their aging parents. Trust funds for pets are also a thing.
But you don’t have to wait until you’re gone to share your wealth. Giving financial gifts while you’re alive will help ensure the gift is used the way you intended, and it can be gratifying to see family members flourish. There may be tax benefits, too.
“The kids might be in lower tax brackets, and you’re in a high tax bracket, so giving money to the kid could actually produce less tax for the entire family,” says Golombek. “It could be done just for tax planning purposes.”
Too many strings
Are there any downsides? If you don’t do your math first, maybe. Everyone needs a solid financial plan to ensure their own expenses are covered before handing out financial gifts. “For people of significant wealth, there won’t be a problem,” says Golombek. “But everyone needs a retirement plan.”
Employing too many strings can lead to other problems, says Jeffery.
“The risk of feeling resentment is probably the big one. The term you often hear is ‘parenting with your wallet,’ and you want to avoid that. … Ultimately, you want to try and raise your children so their actions are a result of the values that you have instilled in them, not because they’re responding to financial incentives.”
Communication can help. Jeffery says families may leave a “letter of wishes” to accompany a trust or will, explaining the intent of the gift.
“You don’t want to leave any surprises for the next generation,” he says. “That doesn’t mean you need to do a big reveal and say ‘here’s what you’re getting’ and ‘here’s how much we’re worth.’ But start sharing your values early or maybe even complete a values exercise to get the wheels spinning with your family. It’s a great kickoff to open up lines of dialogue that can ultimately lead to more in-depth conversations.”