Are you betting on an inheritance to solve your money problems?

We’ve become a nation of waiters. Not the type ready to serve you lunch but serious spenders banking on an inheritance to get us out of our financial jams. Wills and estate lawyer Les Kotzer says “waiter” is the perfect term to describe the growing clientele streaming into his office in Thornhill, a wealthy suburb north of Toronto.

“I’m starting to hear about a lot of people who are depending on this mattress of their parents to fall back on,” said Mr. Kotzer, of Fish & Associates, who tells the story of seemingly wealthy clients who showed up his door and hopped out of an expensive sports car. “They’re flashing Rolex watches, diamond bracelets. I ask them where they live, it’s in an expensive area. I ask him ‘what do you do’. He’s not working. She’s a substitute school teacher.”

None of it makes sense. It turns out their home has a huge mortgage, the cars are leased and the couple are basically broke, deep in debt. Mr. Kotzer can’t figure out how these people will survive.“Finally the wife jumps in and says ‘Harry won’t tell you anything about what he does, he’s a waiter.’ I said ‘what restaurant’ and she tells me ‘not that kind of waiter. He’s waiting for our inheritance. Once he gets it, we’ll pay off all our bills,’” said Mr. Kotzer, recalling the man’s mother was 93.

The long-held view that Baby Boomers are about to hit the jackpot is backed up by a now often-quoted study by Decima Research in 2006 that found about $1-trillion was expected to be passed on to the next generation over 20 years.

It’s unclear how much of that money has passed on since that study was done but anecdotal evidence suggests it has already found its way into the hands of some in the next generation — with realtors even suggesting it is behind the never-ending Canadian housing boom.

The inheritance theme is not one that appears to be disappearing. An HSBC Bank report released in September, 2013, found 39% of working people are banking on some type of inheritance with the median value expected to be $77,213. They’ll probably get their money because the same survey found 57% of fully retired people plan to leave some sort of inheritance with a median value of $175,541 given. Some of the gap between what people plan to leave and what they expect to receive might be explained by taxes that will be owed.

Another trend, clearly gaining steam, although it is hard to quantify, finds many Canadians giving away their fortune to the children in their lifetime, rather than waiting to die.

Phil Soper, chief executive of Royal LePage Real Estate Services, says many home purchases are funded by parents. “Older Baby Boomers today doing estate planning are more sophisticated in their approaches than previous generations, partially because they have more wealth. Family trusts, to move income to children, have become more common and one of the driving forces behind that is to get into home ownership,” said Mr. Soper. ”Scraping together 20% of the cost of a home can be challenging.” In some way it makes sense. Give that child a down payment of 20% or more and they avoid costly mortgage default insurance which is as much as 2.75% of the price of a home. Helping your kid avoid a $13,500 surcharge on a $500,000 home could prove tempting. “We’ve yet to see the big impact of the transfer of wealth from the Baby Boomers to their children,” said Mr. Soper, who thinks in some cultures it is more prevalent than others to help children buy that first home.

If retirees do start handing over the money to their children early, it will be the type of leg up they never got in their lifetime. “About 81% of retired people never received any financial gift or loan from relatives,” said Jocelyn Hsiung, head of HSBC branch networks in British Columbia, about her bank’s study. “But the expectation is changing.”

André Bolduc, a trustee in bankruptcy and vice-president of BDO Canada, cautions against giving away too much and has seen more than one senior land in trouble bailing out a child.“I see it more often,” said Mr. Bolduc about seniors going into bankruptcy because of loans they have made to their child. He notes bankruptcies and insolvencies are increasing faster among seniors than any other demographic group. “Parents get in trouble because of cash flow, they gave a lot to the kids. Sometimes it is because they cosigned [on a loan].”

A report on debt levels in the second quarter of 2013 from ratings agency Equifax Canada Inc. found debt for consumers aged 65 and over had climbed 6.5% over the past year, the biggest year-over-year increase in the period for any age group.

Mr. Bolduc said it’s fine for seniors to give money to their kids if they can afford to but he draws a line in the sand when it comes to taking on debt. “There’s nothing wrong with ‘giving them their inheritance now’ but you have to be conservative when you look at your situation,” he says. “It’s a bad sign if you are putting it on your credit to help your children.”

For the younger generation, he says inheritance can often play a part in financial difficulty. “They are banking on this,” said Mr. Bolduc, who cautions that that money may not be there at the end of the day. “There are things that will mitigate that inheritance. People are living longer, costs are going up and we are seeing more and more seniors retiring with debt like mortgage obligations.”

Walter Pela, a partner with accounting firm KPMG, said there are some good tax reasons to give money to your children early. Transferring assets to children will trigger a capital gains tax because the gift of those assets is considered at fair market value. However, the children assume future tax obligations.

“My experience is there are issues of control and people want to hang onto their assets and deal with it in their will as opposed to giving assets and money away and relying on the benevolence of the kids,” said Mr. Pela. He said what many people are now doing is “freezing their assets” and transferring the growth to the children. It doesn’t cause immediate taxes and you don’t lose control of the assets.

“It’s called an estate freeze. It involves a family trust and holding company. You freeze the assets at today’s values and issue growth shares to your kids and theirs spouses and other beneficiaries,” said Mr. Pela. “You can start distributing future income and gains from the assets. This isn’t done for a cottage but more the financial assets like a portfolio.”

University of Toronto professor David Foot, author of Boom, Bust & Echo, said you need to be careful about averages when it comes to inheritance because some people are giving more than others.

“There are some very rich that drag up the average and more numerous poor,” said Mr. Foot.He also has some sobering thoughts for everyone out there thinking they are going to get their piece of this $1-trillion windfall. It might not go as far as everyone thinks.

“The Boomers in their 50s and 60s are going to start inheriting wealth from people in their 80s. But remember those people had four kids on average, for the Boomers the wealth gets split four ways. Once it starts getting divvied up like that, it’s not nearly so much per person,” said Mr. Foot. The children of those Boomers stand to do much better. “Remember, the Boomers only had 1.5 kids. They might not have half the wealth of their parents, but each kid will get more,” said Mr. Foot.

One last thing to consider is the effect of the low interest rate environment. “It’s crucifying the savings. It’s disastrous for anyone who saves,” said Mr. Foot. “Inflation will erode [that inheritance] quickly.”

Financial Post
Garry Marr | 25/10/13 | Last Updated: 29/10/13 8:30 AM ET

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