November is Financial Literacy Month, and as the financial marketplace grows progressively more daunting, it is imperative that Canadians have the knowledge, tools, and confidence to make informed decisions regarding their finances. Understanding one’s finances is as essential today as arithmetic and basic literacy.
For Financial Literacy Month, we would like to discuss factors to consider when transferring your wealth and when you should start shifting your wealth to the next generation. Everywhere you look, the signs of change are here. The demographics of wealth are moving dramatically around the world, from the growing control of women investors in North America to the expanding middle class in emerging markets. As part of this transformation, the wealth industry will see trillions of dollars of wealth transfer from Baby Boomers to a new generation of GenX and Millennials who have very different investment behaviours.
Predictions show that the GenX and Millennial generations, born between 1965 and 1996, stand to inherit roughly $68 trillion from their Baby Boomer parents over the next couple of decades. Though Millennials are more likely to have a post-secondary degree than their parents, they do not have the advantage of the rapid economic and employment expansion their parents enjoyed. Some analysts have estimated that Millennials have 41% less wealth than someone their age in the late 1980s. Case in point, they are entering and pursuing their careers in a less favourable environment than their parents experienced and will likely need the help from their Baby Boomer parents.
At what age should you plan for the transfer of your Estate?
There is no need to wait until you reach a certain age to plan out the details of transferring your wealth. Whether you are a parent to teenagers, an investor with significant financial assets, an entrepreneur, or a new retiree, the sooner you begin to plan your estate, the better.
Wealth transfer considerations
For years you have worked hard and invested wisely to amass enough wealth to last a lifetime and leave an inheritance for your loved ones. Wealth transfer is the most mature stage of wealth management and involves sharing or transferring your wealth to your chosen benefactors. Wealth transfer considerations can be as simple as making cash gifts to your children or grandchildren or as complex as setting up trusts as part of your estate plan. Below are some helpful considerations for your planning:
1. Analyze your situation
Begin to review all your possessions and compile the documents you need for your advisor to analyze your situation accurately. For example, the types of documents you should begin to organize are:
Legal documents: Marriage/civil union certificates, co-ownership or shareholder agreements and separation/divorce papers.
Tax and financial documents: Income statements, investment statements (RRSP, RESPs, TFSA, LIRA, RRIF), retirement plan statements from current/past employers, loan certificates, debt records, and investment certificates.
Insurance and other documents: Life insurance policy or policies, certificate(s) of authenticity for artwork or collectibles, and birth certificates.
2. Select an Executor for your Estate
When planning for your estate transfer, you will have to designate one or two key individuals who will ensure your wishes are respected. Contemplate designating replacements in case certain people are unable to fulfill their roles. It is the executor’s responsibility to collect the estate’s assets, pay the deceased’s debts, and distribute the estate’s assets following the terms of the will.
3. Write your Will
Estates with a will are simpler to manage. Irrespective of the kind of will, the most recent one written will prevail upon your passing. Your estate will pay tax on capital gains, tax on the balance of your registered retirement plan income, and depending on the province, probate fees are calculated on the estate’s value. Create an open dialogue with your loved ones to avoid surprises and let them know that they should speak with a professional before liquidating your estate. This may allow them to utilize a better strategy and reduce the tax impact.
Passing your wealth in the present
Baby Boomers may want their adult children to benefit from their wealth in the present instead of waiting for an inheritance. In this option you can pass your wealth in the present by helping your adult children purchase a home during the early stage of their careers. This is when many young families have an increased need for additional finances. Another option for passing your wealth now is to look into private alternative investment strategies that help reduce volatility, increase portfolio diversification and offer monthly distributions. By investing in such a strategy to benefit your children today, you can enjoy the opportunity to see your children reap the rewards in your lifetime.
Considerations in a transfer strategy might include how much you should pass over and how much you need to keep for yourself. Some direct approaches may involve a loan or a gift while you are alive. If you are interested in the gift option and are invested in one of our Equiton real estate investment funds you can benefit from monthly distributions as well as from the growth of the investment and use those profits to gift to your children or grandchildren.
This year the Financial Consumer Agency of Canada’s Financial Literacy Month focuses on the renewed National Financial Literacy Strategy 2021-2026 and the importance of building financial resilience in challenging times and a digital economy. Join Equiton and be part of the national conversation on Facebook, Instagram and Twitter to help us increase the awareness and importance of financial literacy. If you would like to participate in this conversation, follow and use the hashtag #FLM2021 on social media.