I was reading the other day that the current cost of raising a child from birth to 17 is about $325,000. And yet, after all that we still want to gift them our wealth?!?! We must be crazy! But having had a child in the last year, I get it. There’s nothing a parent wouldn’t do for their child.
Since your gifts are coming from a place of love, it’s important to make sure you’re not causing your children more harm than good. As I’ll discuss below, there are good ways to gift money to your children and there are not so good ways.
Before I jump into it, I’d like to add one small disclaimer: PLEASE MAKE SURE YOUR RETIREMENT PLANNING HAS BEEN LOOKED AFTER FIRST. This may be obvious to some, but you’d be surprised how many people put their children’s “inheritance” ahead of their own retirement needs. ONLY GIFT WHAT YOU CAN AFFORD TO GIFT.
My top 5 ways to gift to your children
Assuming you’ve completed your retirement plan and can afford to start helping your children, here are some of the best ways to go about doing so:
1. Gift randomly (in both amount and frequency)
If you’re going to give your children money, this is probably the best way to do it. Giving randomly makes your gifts unexpected. What you want to avoid is creating an expectation that you’ll be giving your children money every year. When money is expected, it’s often pre-spent. Imagine what sort of Christmas it would be if your children were banking on receiving their annual $3,000 gift only to find out you’d only be giving them $1,000 this year. “What the heck, I was expecting $3,000. I’ve already booked a trip to Mexico!” What started out as an innocent annual Christmas gift can quickly turn into a negative situation for the family as it has now become an expectation. It’s better to gift random amounts at random moments so the money is never expected or pre-spent. Plus, a pleasant surprise is always met with a smile and genuine appreciation.
2. Gift after the sale of a large asset (such as a farm, business, cottage, etc.)
Gifting after the sale of a large asset is a great way to give your children a lot of money at once while making it obvious that it isn’t to be expected on a regular basis as it was tied to the sale of a large asset. WARNING: If you have additional large assets that you could sell in your lifetime, you could be creating an expectation. So, you might want to address this if that’s the case.
3. Gift your borrowing capacity
Sometimes the best gift you can give your children isn’t cash, but rather access to cash. I’m a big fan of this method because it doesn’t cost you anything as a parent and it can really help your children get going in life. Whether your children are trying to buy their first home or start a business, giving them access to a loan from the bank by being a guarantor is a great way to help. Their name is on the loan, so they’ll have to make the payments and you’re teaching them good money management skills and responsibility. The obvious risk is your children defaulting on their payments, so you’ll still have to do your due diligence before volunteering to guarantee the loan. This is not to be confused with a loan directly between you and your children. Although this could be an alternative to gifting your borrowing capacity, I’m not as big of a fan of this as it costs you money. You have lent it, so you no longer have it vs. simply being a guarantor. Plus, your child may not treat it as a true loan since there wasn’t a loan application involved, nor is there a monthly statement showing up requesting payment.
4. Gift experiences instead of cash
Studies have shown that experiences (e.g. vacations) bring people significantly more joy than material possessions. With these types of gifts, not only will your children appreciate the experiences you buy for them, but you could benefit as well! How much fun would you have going on a week-long family vacation with your whole crew?
5. Gift to your grandkids
This type of gift indirectly helps your children. By making contributions to your grandchildren’s RESPs, for example, you’re relieving some of the pressure from your children to save for their child’s education. If you’re going to give money to your kids, this is also a great way to make sure your money is being put to good use vs. being spent on less “essential” purchases (e.g. a brand-new sports car).
Hopefully, this gives you a couple of ideas of how you can start sharing the wealth. As mentioned above, make sure you don’t get stuck in an annual gift giving cycle that can be hard to break. And again, make sure your own financial future is secure before you start gifting. No sense in giving all your wealth away only to have your children be forced to start taking care of you in your retirement years because you ran out of money.
Colin Sabourin is a Winnipeg based Financial Advisor whose specialty is working with farmers. His focus is on farmers who are planning to sell or transition their farms in the next 5 to 10 years. Colin ensures the process is as smooth and tax efficient as possible, while also creating plans to enable them to start the next chapter of their lives with confidence and security.