If your adult child is living at home or is still on your family "payroll," you may be aware of this issue personally and don't need the media to tell you: Young people, as a whole, may be feeling the financial pinch.
It's not their fault. Wages have crept forward only slightly in the past 40 years, while costs of living, particularly the high prices of housing in major cities, means younger generations may not be enjoying the same standard of living their parents did at the same age. Statistics support this: The baby boomer generation (born between 1946 and 1964) currently owns nearly 50% of all household wealth in Canada while Millennials (born between 1981 and 1997) have just about 8%.1
The COVID-19 pandemic has made the situation worse. Economists say Millennials and Gen-Zers (born in the late 1990s and early 2000s) — some who are still in school and some who in the workforce — suffered through the COVID-19 economic era with job losses, reduced income and financial insecurity.2
If your 20-something kid is still saving for a skateboard instead of a mortgage, you know what we’re talking about.
Parents may naturally want to help out and see their kids get on with their lives, and there are lots of ways to do it. Food and board are obvious, and family plans for car insurance and phones are both convenient and make a lot of sense. But as they get older, move out and still need funds, the size of the handouts can begin to balloon. Parents may rightly be concerned over the sums of money they are giving and how they are doing it.
Tannis Dawson, a High Net Worth Planner with TD Wealth, says without knowing the best way to give kids money, the transactions can be high-risk.
“It all depends on everyone’s individual situation and whether a parent is helping a kid to get through school, finance a wedding, purchase a car or even helping them buy their first home,” she says, pointing out that parents should ensure first that they can afford to help. “But if parents don’t plan properly, they could expose their money to their kid’s creditors or face a big tax bill if they don’t foresee the results of their short-term moves.”
Dawson cautions that there are other risks parents should consider, including what might happen to their loving contribution in the event of a broken marriage or a business partnership. So, if you are considering giving money to one or several children, here are seven ways you could do it.
Give them the money…with no strings attached
The simplest and cheapest way to give money away is to… just give it away, with no contracts, no conditions for payback and no lawyer’s fees. However, Dawson warns that the informality of these interactions offers little support should family relations turn sour. Consider this scenario: A mother agrees to give one of her children some money to help them through an emergency. Years later, the child thinks the money was a gift with no payback expectations. Another sibling, however, thinks it was a loan because it was a sizable amount of money. After the mother passes away, the children may come into conflict if one sibling assumes the money should be paid back to the mother’s estate and another believes it shouldn’t. Dawson suggests that if you do give money away as a no-obligation gift, consider passing it along a little at a time rather than a lump sum because, in most cases, you lose control over how the money is used when you give it to your child.
Use a Deed of Gift
A Deed of Gift is a legal contract that documents the gift of money from one individual to another. Dawson says it can help to avoid the problems of simply giving money away and may also protect the funds in case of a marriage breakup, as long as the gift is for the child alone and not the spouse. (Issues can likewise arise if the funds are used to buy the marital home or have become part of a couple’s joint account.) There are legal fees involved to have a Deed of Gift drawn up, but Dawson points out that giving away assets may also help the parent tax-wise in the future. Fewer assets means potentially fewer taxes to pay and, in the case of death, less probate tax.
Draw up a certified loan
If a parent wishes to be paid back, Dawson says the best choice is a documented loan prepared by a lawyer, which will stipulate the interest and payment schedule. There are legal fees involved, but funds from a loan are protected. As well, a loan has the flexibility to be forgiven in a Will so that the child may never have to pay it back. In this way, a parent can protect their gift while alive and ultimately let the child have the funds at a later date. Dawson notes however that the recipient must actually make interest payments. If there are no signs of payments after a number of years, the courts may declare the loan to be a gift and take away the protections a loan has.
One thing Dawson cautions against: making your own informal loan at the kitchen table. In case of a disagreement on the terms, the contract may not be enforceable and may not provide any protection that a certified loan would.
Use a prescribed rate loan
In this arrangement, an adult child would invest the funds received from the parent and enjoy the income from those investments. And while prescribed rate loans can be complicated, require large sums of money and won’t make sense in all economic climates, this method can help ensure the parent keeps a certain amount of control over the money and is also paid back. In this plan, high-income parents can lend funds for investment purposes to a child at the prescribed rate, which is currently 1% as of July 1, 2020. There is an added advantage that this method would reduce the income of the parent, which may result in a smaller tax bill overall. Dawson says that this method requires a promissory note to be signed and needs a financial advisor, accountant and a lawyer to set this in motion as it has to be economically viable for both parties.
Enact a Trust
Dawson says one of the best ways to protect money is to set up a trust, which also uses a prescribed rate loan. Since the parent is often the trustee, they can remain in control over how much and in what circumstances the money is given. Dawson says that there are legal fees and ongoing accounting costs so a trust may not be a viable option unless large sums of money are involved. But if helping out a child means providing them with housing, an option may be a “bare” trust, in which the child becomes the “beneficial owner” while the parent has legal title to hold the property. This allows the parent to retain control over their asset in case a child’s marriage breaks up or is pursued by creditors.
Hold a mortgage
If a child wishes to buy a home, you can take the role of the bank — if you have the means — and lend the child money through a registered mortgage. The parent would have legal documents drawn up so that the child is legally obliged to pay back the loan while the parent has the assurance of knowing that they hold equity in the home should any problems arise. Again, the asset is protected from financial problems if the child has any. As with a certified loan, the mortgage can be forgiven in the Will.
Jointly purchase a home
Dawson points out several problems with this method of helping out a child, starting with the fact this arrangement can complicate the principle residence exemption for both parties. That could trigger a large tax bill down the line. Secondly, once you become joint owners, the decision can’t be changed. If either party disagrees over the terms of their arrangement, neither can sell the home without permission of the other. Additionally, Dawson says that if a parent is a joint owner of a property, and the child’s marriage ends, the ex-spouse will have a claim on the property, further complicating matters.
Some parents may consider being a guarantor to the mortgage if the child has a poor credit history. Dawson says that also comes with risks: If the child defaults on the loan, creditors could come after the parent if they don’t take responsibility to pay down the mortgage.
Ultimately, helping out your kids in a time of need can be a labour of love but it shouldn’t jeopardize your own financial plans, says Dawson. “It’s best to get help from a financial advisor and lawyer any time you are giving away large sums of money,” she says, “that way they can help to ensure the financial well-being of the parties involved are being looked after.”
- "Distributions of household economic accounts for income, consumption, saving and wealth of Canadian households, 2019," Statistics Canada, June 26, 2020, accessed July 31, 2020, https://www150.statcan.gc.ca/n1/daily-quotidien/200626/dq200626a-eng.htm.↩
- Beata Caranci, James Marple, "Younger Workforce Pays A Steep Price During Recessions," TD Economics, May 8, 2020, accessed July 20, 2020, economics.td.com/younger-workforce, accessed Aug. 10, 2020↩