If you ask Wayne and Dawn Kuzio where they spent some of the happiest times of their lives, they’ll say at Wayne’s family cabin on Brightsand Lake, Sask. The couple, now semi-retired, started vacationing there in the 1980s as newlyweds and continued the family tradition when they had their own kids shortly afterwards. On hot summer mornings, the Kuzios would leave their home in Morinville, Alta., pile the three kids into the family car and drive along secluded country roads to arrive—three hours later—at the family’s little piece of paradise. Those cabin holidays helped the Kuzio family—now based in Sturgeon County, Alta.—build priceless memories. So in 1997, when Wayne’s dad put the lake property up for sale, Dawn and Wayne decided to buy it. “We couldn’t pass up the opportunity,” says Dawn, 55. “We have pig roasts there, leisurely swims and even group fireworks. It’s great.”
The Kuzios’ three kids are grown up now and have families of their own, but Wayne’s biggest wish was to vacation with the entire family at the lake each summer. So five years ago, the couple did something unique. They bought each of their kids a one-acre plot of land near their own cabin on the lake. Average cost? About $50,000 per lot. All the lots sit next to each other and all the Kuzio kids have started building their own places on the lake, something that puts a big smile on Dawn’s face. “We’re at the perfect age to kick back and watch our kids enjoy life,” she says. “So why not help them out now so we can enjoy the good times together?”
For Wayne, 57, the decision to share their wealth now also makes sense because he and Dawn have no more financial worries. “We’ve paid off our house and have no debts,” he says. “We lead a very simple life, we’re do-it-yourselfers and don’t need much money to live well. So what’s the point of leaving the kids an inheritance only when they’re old and grey? Buying the lots now has worked out so well that we plan to keep gifting at appropriate times. Everyone benefits.”
The Kuzios’ story of leaving a living legacy is a happy one—and a trend that financial advisers and estate lawyers are seeing more of these days. You can credit the shift to baby boomers who have lived through some of the most prosperous economic times in history. Many welcome the idea of gifting money now while they’re still alive and able to enjoy the happiness it brings to their families, or to witness the good it can do for a favourite charity. “I tell clients that, provided you can afford it, it’s always better to give with a warm hand, not a cold one,” says Ed Olkovich, a wills and estates lawyer in Toronto. “Many of my clients tell me they want to make sure the children and grandchildren remember them and I tell them, ‘well, the will isn’t really the way to do it. It should start earlier if you can.’”
Les Kotzer, a wills lawyer and author of The Family Fight—Planning to Avoid It, says a client of his called it ‘The Hug Factor.’ “I had a client who wanted to give a cash gift to her grandson while she was still alive,” says Kotzer. “Her husband preferred to wait but her logic was simple. ‘If I give it to my grandchild now, I get a hug and a bit of warmth,’ she explained to me. ‘If you die and give it to him then, you’ll never even get a thank you.’ You know what? They gave the gift to the grandson shortly afterwards and never regretted it.”
If you’re interested in the idea of a living legacy, we can help. We’ll show you how you can give to family and charity while you’re alive—and avoid the dual pitfalls of running out of money or spoiling your kids. “You don’t want to give your kids a free ride, but it can be very helpful to give to them before they’ve accumulated a lot of wealth on their own,” says Kathy Munro, a tax expert with PwC in Toronto. “It’s a careful balancing act.”
Not only can giving be an emotionally fulfilling strategy, but there are tax advantages too. “The tax system is supportive of giving money to a charity,” says Malcolm Burrows, head of philanthropic advisory services at Scotia Private Client Group in Toronto. “Many people give as an extension of who they are and to fill in gaps they see in society. It’s very satisfying.” The best part? You don’t need to be a billionaire to use these strategies either.
Don’t leave yourself short
There are two main reasons why most of us are more comfortable giving in a will— we get to control the money and we get assurance that our money won’t run out before we die. Unless your own retirement is properly funded and planned, you need to make sure that giving a gift now will not leave you short of money later. “This scenario would not be in the best interests of either you or your beneficiaries,” says Heather Franklin, a fee-for-service planner in Toronto. “So make sure your financial needs are 100% taken care of before considering giving an early inheritance.”
Start by sitting down with your financial adviser and having a long-term look at your finances to determine whether your assets will last a lifetime. “I run the numbers with different scenarios with clients to try to get them to step back and see the goal clearly, and my aim is always to impress upon them how important it is never to give any money away that you may need in future,” says Kathy Waite, a fee-for-service adviser in Regina. If you don’t have a financial adviser, consult with a fee-for-service planner in your area. The cost? About $2,000.
Advisers will want to know what you own and what you owe so they can determine your net worth. They’ll also want to determine the income you expect to receive in retirement, including CPP, OAS and company pension plan payments, as well as any dividends from stocks or income from rental properties. By looking at the net income you will need annually to live comfortably (usually somewhere between $40,000 and $80,000, depending on your lifestyle), an adviser can help you determine how long your money will last. “The key to long-term planning is to keep it simple,” says Waite. “And if you run the numbers and you’re unsure whether your money will last, don’t give away any money. Wait until you’re in better financial shape and then consider it again at a future time.”
Many of us can count on living well into our 90s these days, so that needs to be a key consideration in your analysis. That’s the calculus that Peter Helston, 65, and his wife Carol, 61, are doing right now. The couple run their own publishing business in Toronto. “When my mother was 69, she figured out how much she needed to live on comfortably and then gifted cash off-and-on to my two sisters and myself for several years,” remembers Carol. “We want to do the same. So we’re looking at our finances with our accountant so he can put into place a long-term financial plan that will account for all family giving, as well as charitable donations.”
The Helstons are also focusing on tax efficiency. That’s because the year you die, all of your assets will be deemed to have been sold and taxes will be due on your final tax return. Any net capital gains will be included in income and taxed; so will the total value of your RRSP, unless your surviving spouse is named the beneficiary. Of course, the bigger your estate, the larger your tax bill—you can easily reach 35% or more in income tax owing at the time of death. So if you have $1 million in RRSPs and capital gains, you could end up paying about $350,000, depending on the province. “It’s much better to gift money strategically in smaller amounts throughout your life to keep taxes to a minimum,” says Al Feth, a fee-for-service planner in Kitchener, Ont.
The gift of responsibility
No one wants to raise kids who feel entitled, are lazy or expect constant handouts. But remember that money gifted to kids up front is being given instead of an inheritance—not in addition to it. “Our kids have always been industrious, working on our farm and doing mechanical repairs and other odd jobs whenever they could,” says Dawn Kuzio. “They have good jobs and help out in the community. We have no worries that our monetary gifts to them will be wasted.”
Being a good gift-giver doesn’t happen overnight but there are strategies that can smooth the transition and lower the risk of your kids becoming less productive. The key is to start young, and couple the gift with responsibility—after all, how children feel about money has a lot to do with how they see their parents spend it. If you stay productive, you’re charitable and you invest wisely, then your kids will too. “Helping children understand money and how to steer themselves is key, and the sooner the better,” says Derek Moran, a registered financial planner in Kelowna, B.C. “Plus, it’s nice to learn with small amounts, so big ones mean more.”
The important thing is to refrain from giving substantial monetary gifts to kids in their career-building years. Instead, encourage their passions, whatever they may be. Pay for education, housing and other expenses, but avoid gifting large sums of cash. That could end up stopping them from being productive adults.
Of course, ensuring a child gets a good education is a high priority. But with the high expense of raising kids, few parents have money for extras. In such cases grandparents may want to consider gifting money to their children with a specific purpose in mind. “Many grandparents will give money but want it to pay for private schools,” says Munro. “They’re very specific about what the gifted money should be used for and that’s okay.”
Helping a child or grandchild pay for post-secondary education is equally important to many people. Contributing $2,500 a year to an RESP until children are 17 years old means they will receive a government match of $500 up to the lifetime maximum of $7,200—a significant amount. There are other ways to help with an education, too. For instance, when Greg Harris, 38, of Toronto graduated with his engineering degree several years ago, his parents gave him a $10,000 loan at the going interest rate to help him pay off his school debt. “As soon as I graduated in 2000 I paid them back through monthly payments and bonuses,” says Greg. “It took me two years to pay it off but I felt so fortunate. Payments were fairly flexible and it allowed me to start my career without the pressure of traditional bank debt.”
Greg’s parents also loaned him money for other things growing up, like his first car at age 16—a car his wife Anissa, 37, refers to as ‘a beater.’ Greg remembers how his parents were generous but always wanted to be paid back to the penny. “My mom especially is strict about repayment. It made me appreciate any loan they provided me with, as well as the straightforward rules that went along with it,” says Greg. “That’s how she grew up and she wanted her kids to have the same money sense. The early values she taught me about money and why it’s important not to waste it have been important to me in my adult life. I went on to get an MBA, but those first experiences with mom and money were in many ways my first MBA.”
Some parents may also want to consider setting up a Tax-Free Savings Account (TFSA) for their adult children as a tool to teach about saving, investing and thinking long-term. That’s a great gift in itself. “Just realize that you can’t technically contribute to someone else’s TFSA,” says John Mott, a Toronto chartered accountant. “Only an owner can make a contribution. So you have to lend or gift money to the kids and then they have to contribute from their own account.”
The long-term payoff can be huge, too, because the money in TFSAs grows tax-free. “I have clients who gift money to their adult kids to put in their TFSAs every year,” says Munro. “It can provide a nest egg for the child down the road that can be used as a down payment on a house, or simply left to compound until retirement.”
Help them buy their first home
With an increasingly unaffordable housing market, consider contributing in some way towards your child’s first home, possibly by helping out with the down payment. To do it right, David Larock, a mortgage agent with Integrated Mortgage Planners in Toronto, suggests helping your kids with the down payment only after they’ve decided what they can afford and have chosen a home on their own. “That way, the gift doesn’t make it more difficult to pay carrying costs on the home,” says Larock. Second, help kids top up a down payment to 20% or more so they don’t have to pay the additional costs of mortgage default insurance—about $8,777 when buying the average-priced resale home in Canada with a 10% down payment.
If your child can’t qualify for a mortgage on their home, don’t co-sign the loan. It’s usually a sign that they aren’t ready financially and if you co-sign, you’ll be on the hook if the child defaults on the mortgage. Plus, there are other problems. “Co-signing a mortgage can also complicate the process of claiming the province’s land transfer tax refund for first-time buyers,” says Toronto real estate lawyer Alan Silverstein. “The rebate would be available if the parent doesn’t have an ownership interest in the home. The same rules apply to Toronto’s land transfer tax refund.” Combined, those two refunds can total $5,725.
Also keep in mind that if you gift money to your daughter and son-in-law to buy a house, if a divorce occurs, half the value of the home will go to the spouse. “A gift made during marriage is exempt from family property, unless it goes into the matrimonial home,” says Olkovich, the lawyer. “The matrimonial home is a unique situation and the equity in the home is split 50-50 in case of a break up.”
The simplest way to structure the gift is by giving cash. That way, there are no tax implications for either the parents or the kids. Or, consider a parental loan. That’s what the Helstons did with their youngest daughter Lindsey when she decided to buy a townhouse in Toronto last year. “We based the loan on her ability to pay,” says Carol. “We loaned her enough to bring her down payment up to 20% and charged her a nominal interest rate of 1%. She repays us monthly and hasn’t missed a payment yet.”
Munro, the tax expert, likes the idea of prescribed rate loans to encourage responsibility. “Later, you may decide to forgive the loan, or gift it at a future date,” says Munro. But be careful. You may make a loan to a child and they never pay it back—a fairly common scenario. So protect yourself and your relationship with your child by creating a legal document that sets up the terms of the loan along with a payment schedule that is reasonable considering their household income. This goes a long way towards preventing arguments with your child in the future.
Elizabeth Bain, 33, and her husband Sam, 34, of Edmonton, benefitted from her family’s generosity when buying a home. “My parents offered to give us a substantial amount towards a down payment on our first home as an early inheritance,” says Elizabeth, who along with Sam, is self-employed. “We appreciated it but also made sure we could afford the monthly payments before we accepted the gift and bought the home. We’re really grateful for the generosity my parents showed us at that time. It changed our lives.”
The key is not to use gifting as a means to control your children—like telling them the gift depends on the fact that they buy a home near yours. If you put too many conditions on the gift, it can end badly. “Have a good conversation about it,” says Waite, the financial planner. “One client of mine gifted her daughter $15,000 to be used to purchase a home. The daughter used $10,000 towards the down payment and $5,000 for furniture. The parents didn’t like that at all but I reminded them that the reason they gave the gift was to release stress for the new home owners and the gift did do that.”
The truth is, you can have all the best intentions but the fewer hidden motives involved, the more you will be able to talk in the open and feel good about it. “Money and relationships can be tricky and there will be things you can’t control, but you want to ensure the whole situation doesn’t get messy,” says Sandi Martin, a fee-for-service planner in Gravenhurst, Ont. “Often, there are also spouses involved so a gift with no strings attached goes a long way towards accomplishing this.”
Start small—and keep it fun
Many times, the best gifts are the ones that are relatively small and entail spending time with your kids and grandkids. It can be as simple as paying for their cell phone bills while they’re still in school—or even a small vacation.
That’s what Judith Colter, 59, did four years ago when her elderly mother died and left her a small inheritance. She immediately decided to gift each of her two adult kids $5,000 with the caveat that they do something fun with the money. “So we all took a trip to Disney World,” says Colter, who says she was inspired by great memories of travelling with her own mom and dad. “It gave me a lot of pleasure to be able to do that for my kids.”
In fact, Colter, a recent widow, is thinking of making a similar gift again this year. She’d like to give her two kids $5,000 each again and tell them to take a trip in memory of their dad, who passed away earlier this year. “I know how expensive and difficult it is to raise a family these days and it’s lovely to watch them enjoy the money while I’m still alive. I feel good about giving them money for a few fun extras.”
Look beyond family
Many people see giving as an extension of who they are and they want to donate to causes they’re passionate about. “What’s been key in your own personal experiences in life is where donors want to give back,” says Malcolm Burrows, head of Scotia Private Client Group’s philanthropic advisory services. “The passions are there. People just want a way to structure those passions in the context of financial and estate planning.”
For instance, Burrows encourages many of his clients to draw up what he calls biography and vision statements explaining why they choose to give to certain charities. That’s just what businessman James Cohen, 47, and his wife Linda McGarva-Cohen of Winnipeg did several years ago. “We’re animal lovers and love cats in particular,” says James. So last year the couple, who have two cats at home, decided to donate $500,000 for a new tiger habitat at Assiniboine Park Zoo. “On one of our visits we noticed that the tiger cage was very old and we felt bad for the animals,” says James. “We’d seen other zoos around the world where the tigers had more spacious compounds. So we chose the Siberian tiger exhibit in our hometown of Winnipeg as our special donation project. We wanted to do something where we could see the results now.”
The Cohens have also made several other charitable donations, including a refrigerated truck to Winnipeg Harvest. It’s used to redistribute food to dozens of needy areas in the city. “I hate to see food wasted and this is one way Linda and I thought of to redirect that food,” says James. The couple also sponsors three foster children living in Zambia, Zimbabwe and Guatemala and hopes to visit them one day. “It costs just $40 a month to sponsor a child and can really do so much good,” he says. “When I get letters from these small children it’s almost surreal. They live in such poverty that they’d be overwhelmed if they saw the way we live here in Winnipeg.”
If you’re interested in making a cash donation, the best way to donate to a charity is to think about the causes that are important to you and research the charities in that area to determine which ones are right for you. And before you gift any money—other than small amounts of cash—be sure to get good tax advice from an accountant as well as a legal opinion. Follow the rules and you’ll be able to get out of paying capital gains on property or stocks that are given to charity. (See “Jacks on Tax” for the tax advantages of donating to charities.)
It takes some effort to be thoughtful about giving while you’re still alive but the rewards will last a lifetime—and beyond. James and Linda Cohen would certainly agree. Not only are they able to check out the new tiger habitat at the local Winnipeg Zoo on weekends and see the kids from their hometown enjoying it, they’re also learning a lot in the process. In fact, they’re preparing for a trip to Philadelphia right now. The first stop on their list? The tiger habitat at the city’s zoo. “Whatever city we vacation in we try to visit the zoo,” says James. “It’s wonderful to get new ideas and plan for other projects. I’m just 47 and plan to be around a long time. I want to do my part for my community. It’s the opportunity of a lifetime.”