There’s a smart way to shut down the bank of mom and dad
SPECIAL TO THE GLOBE AND MAIL
PUBLISHED SEPTEMBER 6, 2018
Forget asking for keys to the family car. Now, some adult children are soliciting parents for cash to pay for wheels of their own.
But is it any wonder why millennials are turning to the bank of mom and dad to bankroll everything from car payments and mortgages to day-to-day expenses such as phone bills and dental fees? Faced with mounting student loans, sky-high housing costs and lacklustre salaries, launching into early adulthood can seem downright overwhelming. Particularly in high-cost markets such as Vancouver and Toronto, asking parents and grandparents for a handout can even mean the difference between paying rent and not.
“It comes up all the time,” says Ngoc Day, a registered financial planner with Macdonald, Shymko & Company Ltd., a fee-only firm in Vancouver. “There’s a perception that the seniors are very wealthy because the real estate has done so well.”
Parents are often willing to acquiesce to the requests, even if they’re not rolling in real estate dough.
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According to a 2017 poll from CIBC, in which 3,021 randomly selected Canadians participated, 76 per cent of parents with a child 18 years or older said they would give their kids a financial boost to help them kick-start their lives. Think moving out, getting married or moving in with a partner. What’s more, nearly half of the parents said they’d give an average of $24,000.
Of course there are upsides to giving funds to children and grandchildren, particularly if it was going to be earmarked as inheritance later anyway. Monetary gifts to adult children aren’t taxable in Canada. Give as little – or as much – as you want and the kids won’t be saddled with a tax burden come filing time. You’ll also save on estate probate fees if you give the money when you’re still alive. Probate fees can be an issue in provinces such as Ontario, B.C. and Nova Scotia where estates can lose up to 1.5 per cent on the gross total if the amount is large enough.
But there are definitely downsides to generosity, too. Parents can undermine their own financial security for the sake of helping out their kids, Ms. Day says. And once that money is doled out, it is usually difficult to ask for it back later. Consider those gifts expenditures, not investments, she says.
Ms. Day also tells clients considering subsidizing their kids’ expenses to ask themselves an important question first.
“If you spend your money or give it away, does it negatively affect your retirement cash flow? And I don’t mean just for this coming year. I mean for the rest of your life,” she says.
Giving away money isn’t always great for the adult kids either, explains Tony Mahabir, a certified financial planner and chief executive officer of Canfin Financial Group of Companies in Toronto. If a parent subsidizes day-to-day living expenses for an extended period of time, it can just breed dependence on that extra cash.
“You want to make sure your child has a good work ethic. If you’re just helping them live because they have no ambition, that’s a terrible thing,” he cautions.
Chris Horan, a financial advisor with Assante Capital Management Ltd. in Toronto, agrees that giving money can create more problems than it solves, especially if that extra cash is being used to mask a child’s substance abuse or destructive behavioral issue such as overspending. Even so, it can be difficult for some overprotective parents and grandparents to say no.
“The language is the easy part. The parent can just say, ‘I can’t afford it. I don’t have extra,’” he says. “The difficult thing is in the parent’s head – feeling that they should or shouldn’t give.”
Guilt, although common, should never be part of the equation when it comes to deciding to financially support adult offspring. Here are three questions retirees might want to mull over first, so they can give with a clear conscience later.
1. CAN I AFFORD IT?
Financial planning is all about being proactive, so if you think you might want to help children or grandchildren out some day, don’t wait to figure out if you can afford it until after they come to you looking for a handout.
Instead, Mr. Mahabir sits down early on with clients and runs the retirement numbers. If they get the green light to give, say, $200,000 in total, he advises them to keep that information private.
“But then you know you can give the $20,000, $8,000 or $5,000 they’re asking for later without impacting the quality of your life,” he says.
2. WHAT’S MY OBJECTIVE?
In other words, if you’re going to pay for their car down payment, second university degree or phone bill, what’s in it for you? What’s your goal?
The one Mr. Mahabir hears a lot these days?
“I’m hoping to get my child out of the house!” he says, explaining that many parents anticipate that by helping their kids with a mortgage or first and last month’s rent in order to live on their own, that will help foster independence long term.
“I will generally go along with my client if that’s the goal,” he says. “It doesn’t mean it’s a clean ‘yes,’ but I would say, ‘Well, that makes sense. There’s a win-win objective here.’”
3. WHAT ARE MY LIMITS?
Constantly giving away money without an end in sight is a recipe for disaster. At some point there’s got to be compromise. Maybe that means saying you’ll pay for only half of that second university degree, and your child must pay the other half. Or if it’s a loan to start a small business, you ask for part of your loan to be repaid once the company turns a profit.
The tougher cases tend to be the ones where adult kids can’t seem to get on top of their finances and careen from crisis to crisis even after getting bailed out. They’re the ones asking grandparents for a loan to pay the heating bill, but show up for family Thanksgiving dinner driving a brand-new SUV.
“The next month comes around and they’re in the same position again,” Ms. Day says. “That’s when tough love has to come in.”
Sometimes that means simply saying no (and ducking for cover). But according to Ms. Day, there’s an even better solution: Get the kids some professional help. Maybe that’s emotional counselling or a few sessions with a trusted financial planner or money coach.
“That gift will bear much more fruit for the long term,” she says.