Help adult children who return to the nest

To get ahead of the upcoming intergenerational wealth transfer, try adding clients’ kids and grandkids to your book. You’ve likely done that with clients who are well into retirement—and whose kids are in the midst of retirement planning themselves—but what about your clients’ millennial family members?

If you’re reluctant, consider that the assets of your existing clients and those of their young family members are “going to end up being inextricably linked,” says Ty Cooke, director, wealth management and portfolio manager at Orlic Harding Cooke Wealth Management Group in Burlington, Ont.

For Cooke, it’s not a barrier if a client’s adult child has graduated college or university and is working, but still lives with their parents. His firm, which serves physicians, business owners and executives, typically imposes a household minimum of $500,000, but young clients can be added to their family’s accounts while they build their assets.

The number of adult children returning home climbed in the mid-2000s: Canada’s 2006 census found 42.5% of young adults aged 20 to 29 living at home, either because they hadn’t left or had returned, and that was virtually unchanged in 2011 (42.3%). That’s a significant rise from 1991 (32.1%) and 1981 (26.9%). (The 2016 census used a different age range: 34.7% of Canadians aged 20 to 34 lived at home; among those aged 20 to 24, it was 62.6%.)

Where it once may have seemed embarrassing for young adults to live with their parents, “that’s the wrong mindset for this group,” says Cooke, as doing so can help them save and plan out their lives.

One young investor’s experience

Joy D’Souza, a 30-year-old Torontonian who works in communications, speaks from experience: after graduating in 2008 from the University of Ottawa, she hopped back into the nest at age 21 to save for a condo—at her parents’ request.

“My father said I could live on my own but he didn’t want me to rent because it didn’t seem like a smart financial decision, and I’m grateful to him for saying that,” she says. “Buying isn’t the only way to go but, for me, it was the best decision. My money is in my condo now, and that’s an investment.”

Growing up, she says her dad would often talk about finances and investing. D’Souza’s parents began encouraging her at age 15 to start RRSP contributions when she turned 18. Over the years, she’s sought advice from bank advisors.

While living with her family after university, D’Souza didn’t have a strict budget plan. She wanted to buy a condo by age 27, however, so she saved via her RRSP and TFSA for seven years. She first lived with her parents and then, for about three years, her sister. While she didn’t pay rent, she helped cover bills and other household expenses.

One week before her 27th birthday, she bought her condo.

It helped, says D’Souza, that she started her search two years prior, and that she learned from her sister’s experience with the First-Time Home Buyers’ Plan.

Starting in 2016, Canadians between the ages of 50 and 75 were set to inherit a total of $750 billion from their aging family members over the following decade, said a CIBC report from 2016. The report looked at how many people were 75+ at that time (2.5 million), and what percentage of that segment was widowed (45%).

The 2016 census found that 5.9 million Canadians were 65 and over (16.8% of the population), compared to 4.9 million (14.6%) in that age bracket in 2011.

Between 2011 and 2016, the number of Canadians aged 85 and up grew 19.4% (to 770,780), while the number of those aged 100 and up rose 41.3% (to 8,230). At the same time, the number of Canadians aged 15 to 64 increased only 0.4% (to 23.4 million).

She also stuck to her priorities: securing a decent mortgage rate and a good-sized condo in a central location, at a price that still allowed her to set aside emergency funds.

Help millennials weigh their options

Buying a home isn’t a necessity for today’s millennials, and the same goes for using RRSPs, says Joseph Micallef, a tax partner at KPMG in Toronto. A millennial investor may want to go abroad to learn or might change careers and locations multiple times. That requires liquidity and geographic flexibility, he adds.

For millennials in lower tax brackets, “The TFSA is better as a tax-savings vehicle, unless you’re saving to buy a home through the Home Buyers’ Plan or finance further education through [the Lifelong Learning Plan],” says Micallef. “If you end up having to draw upon your RRSP due to a lack of employment security, that can harm you. It’s better to preserve your RRSP room.”

When helping millennial clients who’ve returned home, Cooke first discusses their situation and offers cash-flow analysis. “You go to more of a coaching role as opposed to an advisory role,” he says.

The conversation will dovetail into which tools are available for saving and investing if they have any unspent earnings each month. Cooke favours the TFSA for such clients, and says he mainly helps young investors set short-term and medium-term goals.

“The funds they’re investing are likely going to be used for something in [the] short term, like a home purchase, car or wedding,” all of which typically involve 18- to 24-month plans.

Bonus tax tips

Joseph Micallef, tax partner at KPMG, says parents can get “quite creative with how they decide to finance or help their children out, and that can realize some tax savings.” Here are tips.

Do: Give or sell, in cash, marketable securities that are in loss positions to adult children, to help them understand the world of investing and start building a nest egg. “Parents may decide to gift or sell securities which they own to their adult children, thus enabling them to build some savings to use for a large purchase (e.g., a down payment for a house),” he says. However, “Parents should understand that where securities are gifted or sold to adult children, this will give rise to a disposition and to either a gain or loss for tax purposes” for the parents. A loss doesn’t hurt the parent’s tax situation, Micallef adds.

Don’t: Collect and claim rental income from adult children. “If a parent tries to say their house is now a rental property, it can result in deemed disposition of part of the home.” This could lead to a loss of protection against “a portion of what would otherwise be tax-exempt gains from future disposition of the home,” Micallef says. Instead, parents can consider “having children contribute to household expenses,” which “may be a more desirable way, from a tax perspective, to teach your children about budgeting and the cost of living.”