by Mike Jaczko and Max Beairsto
What are some of the factors a family should consider when passing money along to the next generation? Over $30 trillion (yes, that’s with a T!) in assets will be transferring hands to the next generation in North America in the coming decades. [i]
Given that many independent pharmacy owners are in a position to gift money to their children, the question invariably becomes: who, why, how much and when?
First – fair isn’t always fair
A thoughtfully-developed strategic wealth plan and wealth succession plan may not always mean that each family member receives equal sums. For example, the inheritance by a child who chose to join the family business may be offset with the strategic use of an offsetting equalizing corporate insurance policy. A clear explanation to all family members of why a gift is “fair” is key. Failing to provide a clear explanation may be an Rx for trouble after you are gone.
Why give away wealth now?
Tax savings will likely be one of the main reasons for parents to consider giving away some of their wealth while alive. Furthermore, in some provinces, avoiding probate fees paid on assets that pass along from the deceased estate may be of value. Families also state as a reason watching the children enjoy the benefits of some of your wealth while you are still around.
How much to give early?
You may want to help your children but worry about giving too much too soon and creating a “sense of entitlement,” thus creating a disincentive to work hard. To paraphrase Warren Buffet: “Leave enough so that your kids can do something, but not so much that they can do nothing.”
How much to gift early may be driven by answering the question of “for what purpose.” As parents, you should talk with a qualified financial advisor to confirm whether there is enough money to eventually retire and live at the level of comfort you have become accustomed to. A strategic wealth plan will provide the basic framework of how and when to transfer your wealth. At the same time, communicate with your children to discover what they need or to inform them of the reasoning behind a giving plan.
Which assets to transfer?
Canada has no gift tax, so you can give your children any amount of cash, and it is not taxable as income or deductible as an expense. Giving away cash in your lifetime may save taxes against your estate after you die.
Independent pharmacy owners may deploy a common strategy called an “estate freeze” (the details of which are beyond the scope of this article). Other parents may prefer to give their children cash to help them buy a home, fund their grandchildren’s education, or ensure a child with a disability has enough to pay for a lifetime of needs.
Establishing a trust for a child who is unable to manage money is a worthy consideration. A trust structure can provide parents with continued control of the assets but concurrently provide beneficiaries with money. In addition, assets inside a family trust are protected from creditors and legal proceeding, including divorce.
With gifts comes responsibility
Instilling a sense of stewardship of family assets should remain an important goal. Parents may consider giving their children a small sum initially to determine how their kids handle the money.
Beginning to educate them on ways to handle money will be a valuable skillset for your children before they receive the majority of their inheritance.
We encourage independent pharmacy owners to retain experienced advisors in tax, estate and financial investing and in order to ensure they achieve their goals and objectives.
Mike Jaczko, BSc. Phm, RPh, CIM®, a pharmacist by background, is a portfolio manager, partner and member of KJ Harrison Investors, a Toronto-based private investment management firm servicing individuals and families across Canada. For more information on this topic, email email@example.com.
Max Beairsto, B.Sc. Pharm., MBA, CVA is a pharmacist and valuation analyst with Enterprise Valuators, an Edmonton-based business valuation firm that focuses on business valuations and sale advisory of small and mid-sized private companies.