It is becoming more and more commonplace for Portfolio Managers to work with multiple generations within the same family – even when they live in different households across different provinces. When we have deeper conversations with clients, it typically results in us being introduced to other family members such as their parents, children, grandchildren, and siblings.
Within financial services, the term family is referred to as a “household.” The definition of a household in the typical sense is defined as those people who reside at the same address. In financial services today, the term household extends beyond a single physical address and includes members of the same family, even if they live in different residences.
Families that work together with one Portfolio Manager team can leverage the Portfolio Manager’s knowledge of the family as a whole and obtain several benefits. These advantages range from immediate short-term benefits, such as lower investment counsel fees, all the way to long-term benefits such as estate planning and inter-generational wealth transfer.
As mentioned above, there is a growing trend where multiple generations of a family/household are working together with one Portfolio Manager – we refer to this as “householding.”
To illustrate, we will divide up a larger family into four generations by age. Generation one may be in the age group 75 to 100; the second generation may be in the age group 50 to 74; the third generation may be 25 to 49; and the fourth generation may be one to 24. Each of these different age groups have different goals.
The first generation
The first generation (75 to 100) is often thinking about estate planning and may want to pass on some of their wealth to the other generations either immediately, or over time. Often this generation has more funds than they will ever need during their lifetime. They begin thinking about how they can use their wealth to help their family, and whether this should be done during their lifetime. Many of the strategies that we map out also assist with minimizing tax and simplifying their estate.
When the family accounts are all linked, this process is considerably easier. As an example, the first generation may want to gift financial investments to the second generation to pay off debt, top up their Tax-Free Savings Accounts (TFSA), or to help with retirement savings.
The first generation may also want to help the third generation with a down payment on a home, and gifts funds to contribute to a First Home Savings Account (FHSA). The first generation may want to help the fourth generation with the purchase of a vehicle or to set up Registered Education Savings Plans (RESP).
The second generation
Generation two (50 to 74) is often assisting both the first generation and the third generation. Helping aging parents can be significantly easier when the financial accounts are held at the same financial institution as theirs. We often discuss with the first generation whether there is a member of the second generation that may be suitable to set up as a power of attorney or as a trusted contact person.
Generation two is often transitioning from working to retirement during this phase. When we prepare Total Wealth Plans for the second generation, we will ask whether they have parents that are dependent on them or whether they are expecting inheritances. We encourage communication between the first and second generations. This communication is easier when working with the same Portfolio Manager that knows the family.
We have seen situations where the first generation has an investment account where each adult child will receive a sizable inheritance. If the second generation is unaware that they will receive an inheritance, then they may end up working five or 10 years longer than they needed to.
The third generation
The third generation (25 to 49) may be just starting to invest and wanting to work with a qualified Portfolio Manager. Most established full-service investment firms have minimum account sizes for new clients. For some Portfolio Managers this may be $250,000, $500,000 or $1,000,000. By linking family accounts, the minimum asset requirements for the younger generations can be met.
The third and fourth generations can often only get access to a Portfolio Manager at a full-service investment firm by linking family accounts. With householding, the fees paid for investment management services would be significantly lower when householding family accounts together.
Depending on the situation, we will sometimes explore the first generation skipping the second generation and going directly to the third and four generations. This is especially the case if the second generation is already well established and has taxable income in the top tax bracket.
The fourth generation
Generation four (one to 24) is the most impressionable age group. The first, second, and third generations can all have an impact on the development of financial literacy of the fourth generation.
In British Columbia, you can open an investment account at age 19. Parents and grandparents are able to educate and guide the younger members of the family. Reading books and sharing stories could be the one the greatest financial gifts they receive.
We have had the first generation opening informal in-trust for investment accounts for children and grandchildren. Explaining different investment options and the different types of accounts can create the foundation for further financial lessons. One of the best lessons is to learn the benefit of compounding and starting early.
Parents and grandparents can set up a Registered Education Savings Plan (RESP) for children and grandchildren. This is an opportunity to talk about different investment options to purchase within the RESP. Teaching them about making regular contributions and how the government pays the Canada Education Savings Grant (CESG).
To maximize the $7,200 in CESG, parents or grandparents should contribute $2,500 annually for each child or grandchild. The strategy that we map out is to make 14 contributions of $2,500 and one contribution of $1,000.
The Tax-Free Savings Account (TFSA) is another great account that parents and grandparents can assist their adult children in funding. Individuals who reside in Canada begin accumulating TFSA room in the year they turn 18. What this means is that British Columbians turning 19 in 2024 would have $13,500 in TFSA contribution room immediately (based on annual TFSA contribution limits of $6,500 in 2023 and $7,000 in 2024). There is no attribution for grandparents or parents gifting funds to children 19 years or older.
The First Home Savings Account (FHSA) is a great account for individuals to open beginning at age 19. If grandparents or parents choose to gift money to a grandchild or child, they can then use these funds to put into a FHSA. Grandparents are in the perfect situation to talk about compounding growth over time. Encouraging grandchildren to continue down the path of saving for goals, such as a future car or house purchase, can make a huge difference. Specific to the FHSA, we map out a 5-year plan of contributing $8,000 each year ($40,000 total).
Registered Retirement Savings Plan (RRSP) contributions are often a good idea for those fresh out of university, with higher paying jobs. Like the FHSA, we map out a five-year plan for making contributions.
Our recommendation for grandparents that want to help grandchildren is to give them $7,000 each year for the grandchildren to contribute $7,000 each year for five years ($35,000 total), provided they have the RRSP contribution room. A grandparent can gift funds to a grandchild for the purpose of them using these funds to contribute to an RRSP. Contributing to an RRSP for several years, and then pulling these funds out under the RRSP Home Buyers Plan ($35,000) can be a good strategy.
Again, grandparents and parents have an opportunity to pass on some financial education with respect to which types of accounts provide a deduction for contributions, including the FHSA and Registered Retirement Savings Plan (RRSP).
Gifting money while alive
In our opinion, if a grandparent ultimately wants to gift money to a grandchild, they may be better off gifting funds earlier. This will shift taxable income to a lower income tax bracket resulting in lower overall taxes payable for the family. It will enable a grandchild to take advantage of programs such as the RESP, TFSA, RRSP, and FHSA.
With rising education and housing costs we feel that taking advantage of all these types of accounts are necessary to assist the younger generation in having a better financial footing. One of the benefits of gifting money early is the ability to have meaningful conversations. We have books that we provide to grandparents to share with their grandchildren.
Gifting money as part of an estate
Children and grandchildren are at different ages and contributions to the above registered accounts may not always be equal. It is a relatively easy exercise to keep track of the amounts provided to each child or grandchild.
Many of our clients will want to equalize the amounts for each child or grandchild when it comes to the distribution of their estate. This can be documented as part of our clients’ will and can be equalized when the estate is being processed. When it comes to estate planning and gifts to grandchildren and children, the plan often involves setting up a trust account to make distributions at a certain age (or staged distributions). The trust account(s) can be set up under the householding program as well.
Access to Portfolio Managers
The fourth generation can benefit from householding their accounts with generations one, two and three as they receive access to full-service brokerage and begin compounded growth of their investments at a young age. With householding, family accounts are linked for fee and planning purposes, but the individual investment details are kept separate unless there is a power of attorney in place.
Prior to needing a power of attorney, we encourage our clients to bring other generations into meetings. These meetings help educate them about non-registered, RRSP, FHSA and TFSA accounts. Open communication and being exposed to financial knowledge are two areas that we help facilitate if the generations all consent. One of the best gifts you can give future generations is to assist in this educational process and to introduce them to a qualified Portfolio Manager who helps set them on the correct long-term path.
Householding results in lower taxes
When we meet clients in the first and second generations, they are often paying a significantly higher level of tax then then the third and four generations. The top marginal tax bracket in British Columbia is 53.5 per cent. By shifting taxable income from a high tax bracket to a lower tax bracket (or in some cases no taxes), Canada Revenue Agency (CRA) receives less and the overall family situation benefits.
We encourage our clients who are in the higher income tax bracket to consider all options to lower the amount of taxes they pay to CRA. One of the recommendations is to gift money early to younger generations earlier rather than later. These gifts should follow family discussions and have a framework with respect to how they used, such as: RESP, FHSA, TFSA, RRSP, paying down debt, saving for a home, etc.
Householding results in lower fees
Another benefit of families working together is that they can lower their investment counsel fees. The greater the amount of assets a family has with one Portfolio Manager, the lower the fee can be as a percentage. The fees can fluctuate by Portfolio Manager, and as an example, a Portfolio Manager may charge 1.50 per cent for accounts between $250,000 to $499,999, 1.25 per cent from $500,000 to $999,999, one per cent between $1,000,000 to $1,999,999, 0.90 per cent from $2,000,000 to $2,999,999, 0.80 per cent from $3,000,00 to $3,999,999, 0.70 per cent between $4,000,000 to $4,999,999, and 0.60 per cent over $5,000,000. The fees as a percentage continue to decrease as the household value increases.
To illustrate, we will assume all four generations have investments with three different financial institutions. The first generation has $1,300,000 and would normally have fees at 1.0 per cent (or $13,000 annually). The second generation has $475,000 and would normally have fees at 1.50 per cent (or $7,125 annually). The third generation has $245,000 and is currently investing in mutual funds with an average Management Expense Ratio (MER) at 2.46 per cent (or $6,027 annually). The four generation has $20,000 sitting in the bank account not earning anything. Combined, this family has $2,040,000 in investments and is currently paying $26,152 annually.
However, if the family met with one Portfolio Manager, then the combined household could lower their annual fees by 30 per cent to $18,180 (or a savings of $7,972 annually). Each generation would have their fees decreased to 0.90 per cent based on the above fee schedule.
Householding investment accounts enables all members and generations of the family to benefit from lower fees. It helps the younger generations through enhanced communication and provides introductions to qualified Portfolio Managers to get them started on the right path as early as possible. It also helps the older generation by greatly simplifying the estate planning process and providing peace of mind that everything is in place.
Lastly, linking family accounts enables the Portfolio Manager to provide you and your family the best advice after having reviewed both the family goals and each generation’s overall goals.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor, Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in at timescolonist.com. Call 250.389.2138, email [email protected], and visit .
