The situation
Serge* and Denise* have two children who are young adults and they want to help them buy their first house by giving them at least $100,000 each. Denise, 64, does not work and Serge, 66, works part-time in his company which no longer has any activities as such: it is only asset management. He is hesitating between retiring next year or continuing to work a few hours a week. Both don’t have employer-sponsored pension plans, but have Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and non-registered investments in balanced portfolios. The couple wonders how to go about giving large sums to their children and, more generally, what their disbursement strategy should be. “We are also wondering when would be the best time to apply for the Quebec Pension Plan (QPP) pension and the Old Age Security (OAS) pension,” adds Serge.
Numbers
Serge
- Annual employment income: $75,000
- Assets in his business: $400,000
- Non-registered investments: $750,000
- RRSP: $230,000
- TFSA: $108,000
- QPP: assessed at $8,000 per year at age 65
Denise
- Three lots: total value of $300,000, without mortgage
- Non-registered investments: $20,000
- RRSP: $160,000
- TFSA: $100,000
- QPP: assessed at $1,000 per year at age 65
- Annual cost of living for the couple: $60,000 net
- House: value of $350,000, without mortgage
What are the means of the couple?
At first glance, what strikes Simon Préfontaine, financial planner at Lafond Services Financiers, is that Serge and Denise have a very low cost of living compared to their financial capacity. To get a more precise idea of their means, he made a retirement projection by following the standards of the Institut québécois de planification financière with a return of 4.5% per year, considering that Denise lives to be 96 years old. and Serge, up to 94 years old.
PHOTO HUGO-SÉBASTIEN AUBERT, LA PRESSE ARCHIVES
Simon Préfontaine, financial planner at Lafond Financial Services
“If they don’t give money to their kids while they’re alive, they could be spending $100,000 net of tax a year and they’d have enough money in their investments without having to sell their house and land,” says- he. If they ever live longer, they could sell these assets which will have continued to appreciate over the years. »
He then specifies that if the couple now gives $100,000 to each child, they will still have $92,000 to live on per year, which is well above their standard of living. “The couple will therefore have less $4,000 net of tax per year for life for each $100,000 they give to their children,” explains Simon Préfontaine. So if he gives $400,000, he will live on $84,000. The couple can afford it, as long as they make sure they have estimated their annual lifestyle. »
What is the best way to give to your children?
Denise and Serge also have to think about the human side of the donation, according to the financial planner. “There are young people who have the strength and the discipline to properly manage a large donation, but others for whom it risks ending in disaster,” he warns. The couple knows their children and must make decisions accordingly. »
There are several options. Denise and Serge can wait for the purchase of the houses before making the donations, or even give a large sum to each of the children now and help them manage it well so that it benefits. “It would be a good idea in this case to introduce them to their financial planner so that he can start giving them advice while they are young,” says Simon Préfontaine.
The couple could also decide to make the donations, but to keep control over them. “They could, for example, start giving them money by placing it in separate funds, the only ones that allow you to name an irrevocable beneficiary,” explains the financial planner. Thus, the deposited money would belong to the children, but as long as the parents were alive, they would have to sign so that sums could be withdrawn. »
The couple will also have to think about what tools to use so that their children benefit as much as possible from the donations. Simon Préfontaine suggests opening a TFSA immediately for each child by making the maximum contribution of $8,000 for the first year. “Then, parents can continue to maximize contributions over the years until they reach the maximum amount per TFSA, which is $40,000,” he explains. These amounts can grow tax-free until each child buys their home. But, since they’re young adults who probably aren’t earning a very big salary yet, it might be beneficial to defer the TFSA tax deduction. »
For the rest of the donations, the financial planner advises parents to deposit the amounts in the children’s TFSAs within the limits of the law.
What disbursement strategy to adopt?
As for knowing where to get their money to make these donations, Simon Préfontaine suggests that they look at non-registered investments. “In these investments, you have to see which ones have made the least gains in recent years, or even those which have made losses, because by taking money out, the couple will be taxed on the gains made”, he specifies.
The sale of the land could also be considered if they have made little gain since Denise is the owner, because she will also be taxed on these sums. “But land may have sentimental value, so in that case I would recommend going for non-registered investments,” says the financial planner.
For the rest of things, he advises the couple to continue to gradually withdraw amounts from their non-registered investments, then from those of the company before starting to touch RRSPs and TFSAs. “Thus, they will keep their investments, which grow sheltered from tax, for as long as possible,” he adds.
What about QPP and OAS?
As for the QPP and OAS pension, Simon Préfontaine advises not to apply for them before Serge has finished working to avoid having more tax to pay. “He can continue to work a little if he really wants to, but he definitely doesn’t need the money,” he says. Then, the longer he postpones the QPP and OAS application, the more money it will give them. So if they both wait until they’re 70, it’ll make them an extra $1,250 a year, tax free. »
On the other hand, if they have a health problem, or there is a health problem in the family history, the financial planner advises them to request these sums quickly. “It’s only advantageous to wait if they live a long time, so that’s why many people don’t want to take this risk and prefer to apply for them early in order to dip less into their savings,” says Simon Préfontaine. But, in their case, they have a lot of means, so it makes little difference. »
Finally, he advises the couple to meet with their financial planner with all the details of their situation to make a more precise plan. “But, obviously, they are in a good position to give a significant sum to each of their children. »
*Fictional first names, to preserve their anonymity