Long gone are the days when an adult child leaving the family home for good received nothing more than a hug and wishes of good luck, with the expectation they will make their own way without the need of a financial hand-up from their parents.
Today’s reality is much different as the rising cost of pretty much everything has seen parents — whether they are on the cusp of retirement, semi-retired, or fully retired — restructure their finances and alter best-laid plans to help one or more of their kids.
Executive financial consultant Adam McInroy, CFP, CLU, of Kawartha-based McInroy and Associates Private Wealth Management certainly understands the pressure on parents who want to help their kids succeed, but wants them to be aware of the potential financial effects of any benevolence before they proceed.
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“Once upon a time, as a parent you would launch your child into the world, he or she would become employed and financially independent, and would be able to buy a house and raise a family,” Adam says.
“We have seen a shift in that, especially over the last five years. Children leave home and complete their post-secondary education but, whether they find work or not, come back home to live with their parents due to significant cost of living increases, including food, gas, rent, and mortgages. That’s created what we call the boomerang effect. You’ve launched your children out and they’re coming back.”
Parents on the cusp of retirement, Adam says, “have built their financial lives with the expectation that when they retire, there will be two mouths to feed and no debt to carry, and their pensions and investments will sustain their retirement goals.”
The boomerang effect, he notes, has created a new reality for older parents.
“Now they have three or four mouths to feed, or there’s a student loan payment that has to be made, or they’re offsetting the rent expenses for their children. These are factors they hadn’t taken into consideration previously when it came to developing or managing their retirement plan.”
One of the measures adopted by parents with the means to do so is to build a custom-made house that allows them and their children to live together.
Another measure is parents’ house switching with their children.
“The child has bought a starter home and the parents have the family home that has become too much for them to keep up,” Adam explains. “That creates the opportunity for the parents to scale down to a smaller and more manageable house, usually a bungalow, and the child can move up to something he or she wouldn’t be able to afford otherwise.”
While acknowledging it’s admirable that parents want to help a child get into the housing market or gift them some cash, Adam points out it’s vital that parents clearly understand the impacts of doing so.
“Not just from an asset standpoint, but how does it impact your tax bracket? How is this going to impact your other children? Often parents gifting money to one child will want to gift the same amount to their other children.”
From a financial planning perspective, what it comes down to is making strategic and informed decisions. That’s where Adam and his team support clients.
“If you’re choosing to gift $30,000, $40,000, or $50,000 to your child, you need to know what that means to you today, but also what it means to you in 15 or 20 years,” Adam says. “The decision you make today doesn’t occur in a vacuum. There is an impact — maybe not today, but in the future. Being conscious of that impact is critical to having peace when making the decision.”
“It may mean that you’ll need to sell your home before you actually want to sell it because you need the resources for living expenses. It may mean the trips you were expecting to take every other year are going to have to be cut down to every third year. We go through all the options. It’s amazing how much peace of mind our clients get when they understand the potential impacts.”
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Speaking specifically to the scenario of helping adult children with housing, Adam describes a couple of options.
“We’ve seen some clients say to a child ‘You’re not going to qualify for a mortgage, but we’re all going to live in this house with you. We’re going to write up a formal mortgage agreement with a lawyer that sets out what you have to pay us on a monthly basis at a discounted interest rate.’”
“Another big thing we’ve seen over the last couple of months, with the very high interest for mortgages, is the creation of a loan structure different than a mortgage. A parent says to their child, ‘We’ve got $200,000 working capital earning interest at four per cent. Why don’t I loan it to you at four per cent? It’s a significantly discounted interest rate than what you would get with a mortgage and I’m going to be on title as second mortgage holder.’”
Some parents will make a cash gift to their child for a home down payment. The beauty of that, Adam says, is there are no tax implications for the parents or child as long as the money being gifted is derived from a non-taxable account. However, if the down payment is used for a matrimonial home and the marriage breaks down, the parents and child can’t make a claim on that money as it was co-mingled into the matrimonial home.
Parents can also use their income level to help the child qualify for a mortgage by co-signing a loan, but that also comes with a risk.
“The parents are responsible for payments on the loan if they aren’t made,” Adam notes. “Another thing parents want to consider is the percentage of the house ownership registered to them to lessen or eliminate any capital gains issues in the future.”
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According to Adam, parents who decide to help their children financially should do so not just because they want to and they can, but because they have thought through all the implications.
“It’s about making an informed, non-emotional decision,” he says. “For a lot of our clients, that’s where we provide value and insight. We want to see our clients succeed. To that end, we’re willing to walk through all the what if? scenarios, so they clearly understand the pros and the cons, and we provide a non-biased recommendation, giving them peace of mind.”
“Ultimately, their money is theirs and they’re going to do what they want to do,” Adam says. “But at least they will have clarity and they’re going in with their eyes wide open as to what this means for them. We help them attain that understanding so they can make the right choice for them.”
McInroy & Associates Private Wealth Management is located at 21 King Street West in Bobcaygeon. You can email Adam at [email protected] or call 705-748-1950. For more information about McInroy & Associates Private Wealth Management, visit www.mcinroypwm.com.
Investors Group Financial Services Inc.
This is a general source of information only. It is not intended to provide personalized tax, legal, or investment advice, and is not intended as a solicitation to purchase securities. Adam McInroy is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.
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