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Parents, don’t let your money spoil the kids

Mother and sons paying bills.


For many of the country's wealthy baby boomers, assisting their offspring financially can be a lot more complicated than opening their cheque book.

"It is not necessarily about [whether they] can provide wealth to the next generation, but they are worried about how they will do that, how [their children] will handle the money," said Kevin Dean, an associate with Newport Private Wealth of Toronto.

Well-to-do parents, many of whom have amassed their wealth by running their own businesses or carefully managing their money over decades, are often hesitant to hand over a large sum of money to their children as they start into adulthood, either concerned they might spend it frivolously or lapse into laziness.

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"A lot of high-net-worth individuals are somewhat reluctant to have a full-blown conversation about wealth with their children," Mr. Dean said. "They take the view of holding the cards [tight] to the chest."

The downside of keeping children in the dark about what they stand to inherit arises if the parents die suddenly or are incapacitated. The next generation will not be prepared for managing the family business or being responsible for a sizable estate.

Newport, which specializes in managing the finances of individuals and families with more than $1-million worth of investable assets, often advises parents to start small, providing money for clearly defined purposes, such as school fees or living expenses. In some cases, wealthy parents will offer a tax-efficient, prescribed-rate loan that can be earmarked for investment purposes.

"At the end of the day, the capital, if it is a loan, is still due back to the parent," the Newport adviser said. "But the child gets to see the investment process and be involved in that."

Capital can also be given as a gift to children indirectly through a trust arrangement.

Less-sophisticated scenarios might be based on giving children an allowance to pay for certain expenses or encouraging them to allocate percentages of a regular stipend to spending, savings and even charitable causes. The investment firm calls its intergenerational strategy "catalyst funding," and it is intended to give children of wealthy families a leg up while educating them on finance basics.

The wealth management firm advises parents to consider what interests, values and skills they want to inculcate in their children and how financial strategies will support those objectives.

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Commonsense financial basics can often be in short supply when children of means emerge from university debt-free and enter their work life with lifestyle expectations that are not matched by their paycheque, at least in the early years of their chosen career. "Graduating debt-free means that you can become financially independent sooner than some of the people around you," said Mr. Dean, who, at 25, is part of the Millennial Generation. "You really have been given a gift and you need to make the most of that to make it have a lifelong effect on your lifestyle."

For example, those who graduate without debt should invest the same amount as their peers are paying on student loans into tax-free savings accounts or registered retirement savings plans.

Firms such as Newport that deal with high-net-worth Canadians often find themselves in a delicate balancing act when it comes to family finances. In the end, however, they are working for the parents and that means abiding by their wishes.

It can also involve delivering some sober news to the next generation. The boomers profited from a 20-year stock market bull run and a healthy runup in real estate prices in most of Canada, but those good times look to be over and the bills are starting to come due.

"The mass media view that there is going to be a wildly large transfer of wealth to the next generation is probably overblown," Mr. Dean said. "The past decade has not provided the returns on their portfolios that they were expecting or was put in their plan."

As well, many of the wealthy are supporting their elderly parents, they need to ensure they have enough money for a lengthy retirement themselves and they are much more likely than prior generations to want to leave a charitable legacy.

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To better prepare wealthy offspring for a less gilt-edged lifestyle than they may be expecting, Newport has started an education program it calls NextWave, intended to teach young adults from its larger client base about finances and how their path to wealth accumulation may not necessarily be as smooth as that of their parents: They aren't on the cusp of the longest bull market in history like their parents were, house prices are expensive by historical standards and a tough job market likely means more time in school.

Managing expectations when it comes to future inheritance is particularly important when the family principals are unwilling to discuss just how much the children will be getting down the road. "We do the gift-versus-entitlement argument and we really think that the next generation needs to understand that any inheritance that you receive is just that, it is a gift," he said. "It is not an entitlement."

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