What parents and kids need to know

Navigating difficult and controversial financial issues with your children can be a tough talk. Here’s some expert advice on how to deal with sensitive topics.

The last time Robin spoke to her mother was in May 2011. She had moved her husband, two toddlers and two cats from the Prairies to eastern Ontario to help her aging mother run the family farm. “It was a big risk; I quit my job, we sold our home,” she says. “We made a verbal agreement that my husband and I would assume the property taxes, utility and maintenance costs for running the acreage we lived on in exchange for my mother transferring the property title — we were living on one of three properties she owns.” That arrangement started out all right, but it wasn’t long before things went south. “We’d make property improvements that she heavily criticized; then there were remarks about my parenting and marriage. After enduring 10 months of this and repeated attempts to work things out, I was told that I could stay in my home for free and inherit her assets if I left my husband. Or I’d have to leave the farm and get nothing.”

 

So Robin, now 40, packed up her brood and left. As far as she knows, when her mother eventually — pardon the pun — buys the farm, she won’t get her piece of 100 acres of land (valued at about $650,000 in 2011), a $500,000 life insurance policy and about $500,000 in cash and investments.

 

Robin’s disinheritance is a perfect example of the contentious issues parents and their adult children can face when it comes to the topic of cold, hard cash. We asked the experts about some of the most uncomfortable, potentially embarrassing and — according to what we found — common financial questions folks have. Read on for advice about situations you’re likely either thinking about or perhaps even living through.

 

Question: Should I disinherit my estranged child?

Answer: Well, we know what Robin’s mother did. While you can legally disinherit a child, be prepared to create anger and resentment — not only toward you and your spouse, but toward your other children too.

 

If you go this route, under certain acts, depending on your province or territory (for example, in Nova Scotia it’s called the Testators’ Family Maintenance Act; in BC it’s the Wills, Estates and Succession Act), your disinherited child has the right to make a claim against your estate. Some of the factors a judge would consider when deciding to make variations to your will include whether you had undue influence, you weren’t in your sound mind when your will was prepared or if the language used in your will is unclear. “You need a record of why you want to leave your child out so that when your child makes a claim, he or she will get a letter or an affidavit with the reasons why you made your decision,” says Lauren Randall, an associate lawyer who specializes in estate planning and administration in Dartmouth, NS. If the child contests the will, the court will have the final say. “A judge will look at the evidence — did [the child] have a relationship with the parent? Was the parent’s decision influenced by another child?” Unless the left-out child or children have a really compelling case, the odds of winning aren’t in their favour. Randall says getting good legal advice before you make your decision (whether you’re the parent or child) is key.

 

Question: My father died and left my stepmother his estate. Does she owe me — the daughter from his first marriage — anything?

Answer: It depends on the law in your province or territory and what the will states. “If the stepmother is left everything outright and kids are left out, they have the right to make a claim to the estate within three months,” Randall says. The thing is, most couples own their assets jointly (bank accounts, property, cars, etc.) and if the beneficiary is the spouse, there’s not much for the children to claim against.

 

There’s an issue that can occur in blended families that children and parents should be aware of. Using the example above, after the stepmother collects her late husband’s estate, there’s nothing stopping her from getting remarried and leaving the deceased’s money to her new partner, or writing her will to leave everything to her biological children, leaving Dad’s kids high and dry.

 

There’s one way for a parent’s biological children not to wind up with the short end of the stick — the spousal trust. In our example, let’s say Dad wants to provide for the stepmother while she is alive. With the spousal trust, when she dies, Dad’s assets will go to his children from his first marriage. While Randall says it can be an awkward conversation to have with a spouse, it’s something that should be considered, especially if Dad (in this case) has more wealth than Stepmom.

 

Question: My son opted out of post-secondary school. What will happen to the registered education savings plan (RESP) I’ve been paying into?

Answer: The apple of your eye finishes high school and, to your surprise, announces post-secondary school just isn’t in the cards. It’s clearly not the future you had in mind for your son or daughter, considering you’ve put money into his or her RESP since birth. You’ve even put in at least $2,500 annually to take advantage of the government’s 20% matching program, the Canada Education Savings Grant (CESG), which can add a maximum of $7,200 per child to the kitty. What will happen to all those years’ worth of savings?

 

Anne Perrault, an accountant and money coach in Ottawa who specializes in financial education, says RESPs contain three distinct parts — the contributions, the CESG and the earnings on the first two parts. “Because your contributions are made with after-tax dollars, you can withdraw that portion with no penalty or fee at the current value,” she says. The CESG has to be returned to the government and the earnings portion is paid back to you, less a 20% penalty. “The largest portion of any RESP is the contribution amount. Because it’s tax-free, you can invest it however you like. You might consider opening a tax-free savings account (TFSA) for your young adult, if you think he or she is financially responsible to manage the money,” Perrault says.

 

You can circumvent this problem of figuring out what to do with the funds by opening a family plan from the get-go, so that any siblings will automatically get to use what’s in the RESP. Your financial adviser can provide details about how this works.

 

Another smart option is to transfer the money into a registered retirement savings plan (RRSP) for you or your spouse, which will continue to grow on a tax-deferred basis until retirement. Your plan administrator should discuss your options with you. Finally, since RESPs can remain open for more than 35 years, some experts suggest waiting for several years before moving the money to see if your child changes his or her mind about going after that degree.

 

Question: Do I have to be fair and split my estate equally among my kids?

Answer: Sarah is 64 and has three adult children, ages 40, 42 and 44. When she first thought about her will she decided a three-way split was the way to go. Eventually that changed. “My middle child and his partner at the time, who is also the mother of his daughter, were doing drugs and there was no way I was leaving any of my or my father’s (the kids’ grandfather’s) hard-earned money to people who would squander it,” says Sarah. “I made a provision in my will for my granddaughter so her education would be covered.” Sarah decided to appoint her oldest and youngest as the executors, and never told her middle son her plans. In the years since, he has cleaned up his act and started working in the family business, so Sarah put him back in the will last year.

 

While most experts, including Tim O’Toole, a registered financial planner in Winnipeg, say the vast majority of parents split their estates evenly among their children, fair doesn’t always mean equal. “The classic example out here are farm families. Mom and Dad have three kids — one stays and works on the farm while the other two go to university and live and work in the city,” he says. “Let’s say the farm is worth $3 million. Is it fair to take away 20, 30, 40 years of work the one child has put in and give $1 million to each kid? I don’t think so — sweat equity should play a part here. Instead, maybe the farm should go to the child who stayed back and, say, the life insurance money or other assets should be split among the other two children,” says O’Toole. If you’re planning on deviating from divvying up your estate evenly, the best advice O’Toole has is to call a family meeting and get it all out on the table so there aren’t any surprises when you’re gone. Randall agrees, and adds that this may be a good time to include a “hotchpot clause” in your will, which basically says that any gifts, loans or advancements parents give to their children will be considered in the division of the estate and subtracted from that child’s portion.

 

Income taxes are another complicating factor when dividing up your estate among your children, says Kurt Rosentreter, an accountant and certified financial planner at Manulife Securities Inc., in Toronto. The tax bill for all your assets falls to your estate, regardless of whether those assets are in the will or not. So if, for example, one of your children is listed as the beneficiary of your RRSP, he or she will get that money directly but the taxes will be due from the estate. Make sure you take the tax cost of your assets on death into consideration in order to end up with the distribution to heirs that you desire.

 

Question: What’s the best way to lend money to my adult children?

Answer: Helen, 76, frequently gave her son, Brian, money and she used to pay his bills. The payments started when Brian, who is now nearly 50, first went to university — Helen paid for what Brian’s student loans didn’t cover. When he quit that school, came home and started at another university, Helen paid for his residence and later a room he rented from a friend.

 

She continued to give him money over the next several years — sometimes he worked, sometimes he didn’t. He’s also lived with her on and off rent-free. “I’ve supported him for about 20 years; I’ve given him about $30,000,” says Helen.

 

For parents who can afford to lend their child money, Perrault says it is important to lay out clear terms of repayment and that these conditions should be signed by both parties. And if the child has a spouse who will also benefit from the loan, he or she should sign as well. “Some parents may think that an official signed document is overkill, but what they don’t realize is that these documents become a necessity in the following circumstances: death of the parent or child, divorce of the parent or child or insolvency proceedings of the parent or child,” she says. “In the case of a deceased parent, it will be important that the will stipulates how this loan will be dealt with. It is most important if the child has siblings who did not get a loan. This will avoid disputes.”

 

As for parents who cannot afford to help their children financially, yes, you may feel guilt, but that doesn’t mean you should fall deeper into debt to spot your kids extra cash. “This is where needs and wants come in,” says O’Toole. “I see a lot of parents who want to help and do more than they need to because their kid, for example, lives in a $300,000 house and wants to move into a $600,000 house. You shouldn’t remortgage your home or dip into your RRSPs for this — both will have a negative impact on your retirement planning and cash flow. It’s a bad idea financially.” That said, O’Toole acknowledges that because parents love their kids unconditionally, the truth is, it’s sometimes hard to say no. So if you’re going to lend your child money, get the cash from your line of credit or TFSA. If this isn’t doable — and if the money is for a want, not a need — tell your offspring you just don’t have the funds and check your guilt at the door.