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A significant benefit of gifting to grandchildren is the opportunity to start coaching the next generation on wealth management.iStockPhoto / Getty Images

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Many grandparents are looking with alarm at the high costs of education and homes, the impact of high interest rates and inflation, the disappearance of defined-benefit pension plans, and recognize that their grandchildren face significant hurdles on their journey toward financial security. In turn, some are stepping in to help.

“We’re working with several of our clients who have multiple grandchildren to create a plan for helping [them out],” says Maili Wong, senior wealth advisor and senior portfolio manager with the Wong Group at Wellington-Altus Private Wealth Inc. in Vancouver.

“It’s almost like a generation-skipping benefit, but in a way, it also inherently helps their adult children create a nest egg for the kids.”

Ms. Wong recently hosted a family meeting with grandparent clients and their grandchildren ­– the ones in town joining in person and the others signing in to a video meeting. The goal was to help the grandparents share why they wanted to set up a gift and what they expect the money to be used for as well as give the grandchildren an opportunity to thank them.

“I think it’s so beautiful because, oftentimes, if the money is just gifted in the will, there’s not necessarily always the same context that’s provided,” Ms. Wong says. “Greater clarity can avoid future conflicts.”

There are many vehicles grandparents can use to share their wealth two generations down, including tax-favoured registered education savings plans (RESPs) and for adult grandchildren tax-free savings accounts – sometimes matching older grandchildren’s contributions to encourage saving. But Ms. Wong says permanent life insurance can be even more flexible.

“There are fewer limitations on the amount, and you can actually really magnify the impact with small amounts of money over time,” she says.

“Grandparents aren’t thinking about the mortality of their grandchildren … The life insurance is a useful tax-deferred vehicle to grow the money within the insurance policy that the grandchild can then access when they’re ready.”

Generally, the cost of insuring a child or young adult’s life is low and, after the policy ownership ultimately transfers to them, the grandchildren can leverage this asset for education, a down payment for a home, a business launch, or anything else.

Ms. Wong points to hybrid solutions for families with grandchildren of widely varying ages – for example, setting up life insurance for the kids and an investment portfolio for young adults who may need access to the money sooner.

Passing on values and value

When grandparents give to grandchildren during their lifetimes, Gillian Stovel Rivers, senior wealth advisor and branch owner with Surround Wealth Advisors at Assante Financial Management Ltd. in Burlington, Ont., sees it as an opportunity to transfer values as well as value to the younger generation.

The pandemic triggered some of these conversations in her practice as grandparents stopped travelling and looked for meaningful ways to redirect the money they were saving.

“That’s when my team and I started to get pretty creative about how can we approach these conversations so that what results is not just a transaction,” Ms. Stovel Rivers says.

“It’s not just the grandparent handing the kids a piece of paper that the kids don’t understand, but instead it’s the creation of something deeper that’s maybe a relationship between the grandkids and the grandparents around what money means and what wealth means.”

It’s about helping grandchildren understand and handing them the opportunity to either own, create, develop or cultivate wealth, she adds.

From least to most tax-efficient, the three strategies she sees used most frequently are an in-trust account, a whole life insurance policy, along the lines of what Ms. Wong suggests, or participation in a donor-advised fund or family foundation.

In an in-trust account, everything except capital gains will be taxed in the hands of the grandparent while the child is a minor. In a whole life insurance policy, contributions can compound within a completely tax-sheltered structure, and then grandchildren can access the money tax-efficiently either by borrowing directly from the policy and paying it back before the withdrawal becomes taxable or by using the policy’s cash value as collateral for a longer-term bank loan.

A donor-advised fund or family foundation is the most tax-efficient solution and, while it isn’t a direct gift of money to grandchildren, it invites grandchildren to discuss what they want to change in the world, and see what grandparents what to change too.

“We find that to be a very powerful tool, particularly with grandparents who might be in a situation where they have some [securities] that are so packed with capital gains that maybe the best thing to do would be to dodge the capital gains [tax] altogether by donating the shares,” Ms. Stovel Rivers says.

Education, down payments and pensions

Susan O’Brien, wealth advisor with Susan O’Brien Group Wealth Advisory at Richardson Wealth Ltd. in Calgary, advises multiple generations of a family – sometimes as many as four – and says grandparents often zero in on one of three main areas when planning living gifts for grandchildren: private school and post-secondary education (using RESPs, informal trusts or separate investment accounts that remain in the grandparent’s name); down payments on first homes (generally by transferring cash); and replacements for the younger generation’s missing pension (using permanent life insurance).

She has helped facilitate letters from grandparents that explain the gift – for example, in the case of help with a down payment, telling grandchildren how important buying a first home was for the grandparents, how they saved for it, and then raised their family in it.

“They’re giving gifts in accordance with their own values, and I think having letters, family conversations around that [is important], outlining expectations,” Ms. O’Brien says.

You have to get the parents on side as well, she adds.

“You have to make sure that the parents are comfortable, that these decisions aren’t just put on them but they’re part of it,” she says. “We’ve never found an issue when there’s open, honest, truthful communication.”

The biggest pitfall Ms. O’Brien has encountered is grandparents being “generous to a fault” and jeopardizing their own retirement and capacity to grow older with dignity – because it’s important to recognize that once a gift is made, it can’t be undone. A first grandchild lavished with a generous gift could be followed by other grandchildren who will require fair treatment.

A significant benefit is the opportunity to start coaching the next generation on wealth management.

“We get to help those in Generation Z and millennials start to learn about money. We’re investing it wisely,” Ms. O’Brien says. “We’re meeting with them, helping them think about it … This is a great experience for everyone.”

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