At Northwood Family Office, we have the privilege of working with some of Canada’s most affluent families, and it’s always fascinating to learn how each family came to accumulate their wealth. Each story is different and can range from the expected—the sale of a business or successful investment—to the unexpected—a surprise inheritance or lottery win. And although each family’s path is unique, they all face similar challenges. Today, for many, the number one issue on the list is how to successfully transfer their wealth to the next generation.

Here are the three most common questions we hear on this topic and how we help our families answer them.

Question 1: How Much Should We Transfer to Our Children?

When we hear this question, we typically start by asking the following one in return: “How much are your children ready to receive?” It is a challenging question, and we don’t necessarily expect a specific answer (spoiler: many jokingly say $0). Rather, the purpose is to get them thinking about the impact that receiving a significant sum of wealth might have on their children.

We remind them that “money is an amplifier of all things, good and bad,” meaning whichever path their children are currently on will likely accelerate if wealth is added to the equation. If their children have experience managing wealth and have demonstrated sound financial stewardship, then receiving additional wealth likely won’t knock them off course. In contrast, a child who has a history of unpaid credit card bills and failed investments might have a far less favourable outcome.

We also find it helpful to provide context into what a large lump-sum receipt of wealth means in terms of its ability to alter a person’s life. To do this, we like to equate a lump sum amount to an individual’s ability to accumulate wealth over a full working career.

For example, if a person were to receive $5,000,000 today, it is the equivalent to the career earnings of the following individual: someone who starts working at 25, earns $185,000 after-tax their first year, receives 2% annual raises, invests their earnings to earn 4%, and works for 40 years.

When the conversation is framed this way, families quickly see that a lump sum inheritance can enable their children to materially change their lives if they wish (e.g., quit their job, buy a bigger house, etc.). Some families are comfortable with this, but many others recognize that it might have unintended negative consequences.

It is also helpful to consider the family’s philanthropic goals, if any. Clients may choose to allocate part of their estate to charitable causes with the intention that their children continue stewarding those charitable dollars, for example through a private foundation or donor-advised fund.

When it comes to the amount of wealth to transfer, each family is unique. However, by asking the right questions and providing context into the potential impact of the wealth, each family is ultimately able to arrive at a decision that is right for them.

Question 2: When Should We Transition Our Wealth to Our Children?

Often the answer from the first question leads into the response to this one, and in many instances, when it comes to timing, clients come to realize that perhaps “later is better.” We generally agree with this way of thinking and like to see children get some real-life experience prior to receiving any significant wealth. This might mean establishing their career path, experiencing a few life “wins” (e.g., a promotion at work, getting married, etc.), or life “challenges” (e.g., saving for a purchase or managing a budget). Some refer to this as “earning their way into adulthood.”

At the same time, clients are eager to start transitioning their wealth to their children prior to their deaths. They recognize that they are likely to live into their nineties, and don’t want their children to grow up to be waiters (waiting for their parents to die so they can inherit). In this instance, we recommend a milestone gifting approach, where periodic gifts of capital are provided to coincide with important life events. For example, providing financial support toward the cost of a wedding, the birth of a child, or the purchase of a first home are all points in time where the next generation could benefit from some financial support.

We’ve also seen successful outcomes where a portion of the wealth is transitioned as a method to strengthen financial stewardship skills. Investment accounts might be funded for a child with the stipulation that they work with the family investment advisors or enrol in a financial literacy program. Through this initiative, the next generation is developing valuable skills that will be required for when they inherit a much larger sum in the future.

We also ensure that the principles being followed by our clients while they are alive are reflected in their estate plans. It is common for our clients to structure their estates to pass to their children in trust, where capital is distributed over time rather than in one lump-sum (e.g., one third of the estate at each of ages of 30, 35, and 40). Structuring the estate this way mirrors the milestone approach mentioned above and provides protection to the beneficiaries and the family capital. In other words, if they make a mistake with the first third of their inheritance, they will hopefully learn from that mistake and be better prepared for when they receive the remainder.

Question 3: How Should We Talk to Our Children About Our Plans?

The key is for both the parents and their children to be ready to have the conversation. Parents must be confident that they will not change their plans significantly in the future, and that they are prepared to answer the questions their children might have (e.g., why are you not transferring the wealth sooner?). Conversely, parents must also be confident that their children are in a position where the new information will have a positive impact on their lives and will not push them off course.

In our experience, building up to this conversation through recurring family meetings is the most effective approach to ensure that it all goes well. We are often asked to chair these meetings, and we tend to focus the first few get-togethers on family values, communication, and shared goals. Only once we see that the family is aligned will we introduce financial related topics.

Conclusion

Successfully transitioning wealth to the next generation is a challenge that many families put into the “important, but not urgent” bucket. It’s one of those things that’s easy to push off into the future, but the reality is that it will only get harder to tackle the longer you wait. As advisors, we help give our clients a nudge by proactively talking with them about their wealth transition plans, building their confidence, and helping to prepare the next generation. No two families are the same, and each must determine their own answers for how much, when, and how to talk about their wealth transition plans.

About the Author

Andrew Jeffery is a VP in the Family Office Advisory Group at Northwood Family Office, and sits on the firm’s management committee. He specializes in helping multi-generational families in the areas of financial planning, investment management, tax and estate planning, and family governance. Prior to joining Northwood, Andy worked in public accounting as a tax specialist, and spent time at an independent financial planning firm. As a financial literacy advocate, he regularly facilitates educational sessions on behalf of CPA Canada for individuals, families, and entrepreneurs.