Survey reveals parents have become an essential support as youth unemployment, cost of living creep higher, but this dynamic comes with estate implications
The kids might not be alright, but mom, dad, granny, and grandpa are prepared to help out. A recent survey from BMO Financial Group found that 45 per cent of Canadian parents and grandparents plan to financially support their adult children or grandchildren over the next 12 months. 22 per cent of Gen Z Canadians also said they rely on their families to cover general expenses. 16 per cent expect help with student loans and 13 per cent expect assistance with the costs of their own children.
This report comes amid a high rate of youth unemployment in Canada and an ongoing affordability crisis. Just as it highlighted a trend in how families are moving money to manage these issues, the survey found that Canadians still expect to give or receive an inheritance or a living gift. That expectation, however, comes with challenges for advisors as they work to define those expectations and sustainably integrate living gifts, ongoing financial support, and inheritances into the financial plan.
“One item that really jumped out at me is the fact that this survey has identified that a lot more parents and grandparents are looking at making a gift in the next year. So in the last three years, we've noticed that people have been making gifts or loans for larger purchases, like the down payment of a home. But this survey actually is saying that the gifts are made more for day-to-day lifestyle expenses that the younger generation needs help with,” says Lydia Potocnik, Vice-President and Regional Director, Estate and Trust Services at BMO. “If you do have parents that are financially successful and can offer that support, I think it's great. However, I also caution parents to make sure that they're also holding their kids accountable so that they're not becoming dependent on you long term for financial support.”
Potocnik highlights a segment of survey respondents who say they plan to support their children or grandchildren for the rest of their lives, which she argues may be an unsustainable expectation for all parties involved. Those parents and grandparents are facing similar cost of living increases, with the potential that they haven’t fully reconciled the costs associated with things like long-term care. The issue now may arise as they see their loved ones in a short-term cost crisis and the decisions they’re taking to address that might not come with a real consideration of long-term implications.
Advisors can help insert that long-term thinking into these decisions, Potocnik says. She offers the hypothetical of a client asking to withdraw $100,000 to help a child manage expenses. Advisors, she notes, can ask what the intention of that withdrawal is, whether it’s meant to be a loan, an advance on the inheritance that should be reflected in the will, or a gift to be given right now. They can then show what that withdrawal means for the client’s financial plan long-term and whether they can truly afford to give their child that much.
Potocnik also recommends that advisors talk to their clients about more structured ways to support the next generation, that could be in the form of a trust with incentives around finding work, earning money, and building towards a career. She gives the example of a trust that pays a child $1,000 per month, provided that child also earns $1,000 per month in employment income. In a tight job market and cost of living crisis, Potocnik notes that these kind of incentives can help children lay the building blocks of a future career through work at potentially less lucrative jobs.
The survey found something of a definition problem in the way both givers and inheritors think about an eventual inheritance. More than half of Gen Z and Millennials surveyed said they expect to receive a cash inheritance. One fifth of respondents from those generations had already received, or expect to receive, a part of their inheritance while their parents or grandparents are still alive. Few of these stakeholders, however, know how much they will eventually give or receive or what that money might be specifically used or earmarked for.
It is often impossible to find a specific number that will be inherited, Potocnik says, but sometimes a lack of even a ballpark can create less realistic expectations for inheritors. Some parents may not want to discuss the inheritance for fear that it might create entitlement or disincentivize work among their children. However, Potocnik notes that there can be challenges that emerge when children expected one number but a mixture of late-life costs, tax bills, and unforeseen expenses result in a far lower number hitting their accounts. Advisors, she notes, can help facilitate conversations that create more realistic expectations for all parties.
“Make sure you're having those proactive conversations with clients and look for any identifiable red flags that may warrant you to reach out and find out what they’re planning to do to support their children or grandchildren,” Potocnik says. “Don’t be afraid to have an open conversation with clients in the next generation as well as a family unit. I know sometimes those conversations can be awkward, but I think when you bring in the next generation, it's an opportunity to teach them about financial planning and accumulating their own wealth and helping them get on the right path when it comes to financial literacy as well.”
