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Grandparents can consider various options to help their grandchildren, such as RESPs, informal trusts and joint accounts. But advisors need to be clear about the tax implications and financial risks of these approaches.vgajic/iStockPhoto / Getty Images

Older Canadians, many of whom have amassed significant amounts of wealth, are seeing their grandchildren experience challenging financial issues, from mounting costs for post-secondary education to high rental costs or down payments to purchase their first homes. In turn, many grandparents are looking for ways in which they can help their grandchildren financially. But intergenerational giving can be complex for financial advisors to navigate – and have big implications for all parties.

“Financial advisors need to book real time to sit down and learn not just about the older person, but also to ask probing questions about the relationships,” says Laura Tamblyn Watts, chief public policy officer at CARP (formerly the Canadian Association for Retired Persons).

To do that, advisors should have a checklist for discussions with grandparents and the rest of the family. A big reason why this is necessary, Ms. Tamblyn Watts says, is that people underestimate how long they’re going to live and how much they will need for the last years of their lives.

Some questions worth asking these clients, she says, include: “What happens if, Grandpa, you fell and broke a hip and needed mobility assistance? What if you fell in love and moved across the country? What if you decided you didn’t want your $100,000 [invested] in your grandkid’s house any more – and how would you get it out?”

Part of the complexity relates not only to potential changes in grandparents’ lives or financial circumstances, but the vehicles and strategies available to them to help out their grandchildren.

When it comes to helping younger grandchildren plan for post-secondary education, many grandparents set up or contribute to a registered education savings plan (RESP), says James McCreath, portfolio manager at the McCreath Group at BMO Nesbitt Burns Inc., in Calgary.

An RESP has no tax risk for the grandparent as there is tax deferral on the plan’s income until it’s withdrawn by the adult child when heading to post-secondary school – and the federal government kicks in some matching grant money, too, with the Canada Education Savings Grant.

“For every dollar you put in, the federal government puts in 20 cents. There’s a limit to the grant. The grant maxes out at $500 a year or $7,200 lifetime [per child],” says Mr. McCreath. “You can put in more than $2,500 [annually per child], but the government doesn’t give you matching grants.”

In addition, the maximum cumulative contribution to an RESP is $50,000. Jay Schmidt, a partner at JMH and Co. Chartered Professional Accountants in Calgary, says some of his wealthier clients put the full $50,000 into a grandchild’s RESP in the first year.

“They would only get the $500 Canada Education Saving Grant for the one year, but the idea is that … having that contribution in there longer is more advantageous [from a capital appreciation perspective] than getting the government grant,” he says.

Whether it’s for education or other matters, grandparents can consider other options to help their grandchildren, such as informal trusts and joint accounts. But advisors need to be clear about the tax implications and financial risks of these approaches.

Advisors can set up informal trusts for their clients without involving a lawyer – and the beneficiary’s use of the funds upon reaching adulthood is not limited to education.

“The pitfalls far outweigh the benefits of the informal trust, but it is a way to split income,” says Mr. Schmidt. “For example, interest and dividends earned by the gifted property [including cash] by a minor beneficiary attribute back to the contributor of the property or funds [the grandparent in this case] but capital gains do not. Any capital gains realized in this scenario would be taxed in the hands of the beneficiary [the grandchild] even if they are a minor.”

Mr. McCreath points out that there is also the question of whether the grandparents’ purpose for setting up the trust will be fulfilled.

“The drawback of the informal trust is that upon reaching the age of majority, the child has access to the trust and they can do whatever they want with it,” he says. “If the desire is to pay for education or the down payment on a house, that may not be what ends up happening with the money.”

Grandparents can also simply gift stocks or property to a grandchild, but that approach can also have tax implications of which advisors and clients need to be aware.

“When gifting property, it is deemed to be disposed of at fair market value,” says Mr. Schmidt. “So, let’s say stocks are sitting on an unrealized gain of $100,000. It’s as if you had sold the shares and reacquired them at the new value – it will trigger a deemed disposition. If granddad’s sitting on an unrealized gain, he will be taxed at the time the gift [is made].”

In the case of joint accounts, Ms. Tamblyn Watts cautions grandparents to avoid joint ownership of assets with adult grandchildren, including title on a house.

“We see this as one of the biggest mistakes that financial advisors make,” says Ms. Tamblyn Watts. “There’s not always a full realization that when a grandfather decides to put an adult grandchild into joint name to avoid probate, what it does is transfer ownership, so now they each own the house. That asset can be claimed against a family relations claim. The grandson gets divorced. The asset isn’t protected.”

If a grandparent wants to help an adult grandchild get a down payment or start a business, another possibility is a loan, suggests Mr. McCreath.

“That takes some discussion with an accountant to structure it appropriately,” he says. “If [the grandparent] ever thought things weren’t going well, [they] could call the loan.”

For wealthier grandparents, some advisors recommend family trusts. These vehicles get around some tax implications for the grandparents and leave control of the disbursal of the funds in the grandparents’ hands if they are the trustees. But formal trusts require help from a lawyer and accountant.

“The cost varies according to complexity,” says Mr. Schmidt. “Ballpark, you’re looking at $5,000 to $7,500 to set the thing up and then annual accounting fees.”

Those annual fees for tax preparation and filing can start around $500 a year and go up from there.

”The benefit has to outweigh the cost. … People aren’t doing it for $10,000 or even $100,000. Typically, we see the family trust at upward of $1-million,” says Mr. Schmidt.

But he adds his practice has seen an increase in family trusts during the past 10 years as the pitfalls of joint accounts and ownership become more evident.

Advisors agree that whatever the instrument being used to help out grandchildren – whether a gift, a loan or an advance on an inheritance – the intention should be documented to avoid issues with the grandparents’ estate planning.

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