There is so much grandparents want to pass along to their grandchildren. There are the foundational pieces in life, such as love, respect, and kindness. And while we all know these attributes can’t be bought, they are an important part of many parents and grandparents’ legacies.
All grandparents want to give our grandchildren the world, and that often includes financial support. But not everyone is in a solid financial position to help. However, as financial professionals, we can help grandparents understand the options available to them to help leave a legacy for their grandchildren.
I often joke with my adult children that our grandchildren don’t need another toy, designer outfit, or the latest technology for this birthday, holiday, or special event. What they do need is a financial contribution to their education fund. And that is precisely what we do.
I believe education is the great equalizer. We are trying to give our grandchildren the world by providing them with an opportunity to grow, develop and learn.
Education is truly the gift that keeps giving long after new toys are forgotten, styles have changed, and technology has moved to a new generation.
But it isn’t cheap.
Based on data provided by Statistics Canada, the average cost of a four-year university degree starting in 2022 is $96,004 for students in residence or $48,074 for students opting to live at home.
The escalating costs led us to save early and contribute often not only to our children but to our grandchildren as well. The plan of choice for us has been a Registered Education Savings Plan or RESP.
Using a Registered Education Savings Plan
Here are a few of the basics:
- The government will match contributions up to $500 per year for a lifetime total of $7,200 per child via the Canada Education Savings Grant.
- The savings will grow tax-free within the plan; however, grants and growth accumulated are taxed at the student’s rate when withdrawn. Typically, this is fine for most students who have little or no income, resulting in the money being withdrawn tax-free.
- The student decides where to spend the money. Tuition, books, meals, accommodation etc. At the same time, the money can be used for a wide range of post-secondary educational options, including apprenticeship programs, college, trade, or a university degree.
Yet the reality for some of your clients is that their desire to help their children or grandchildren fund their education trumps their financial ability. Some clients will make small regular contributions, while others may decide to take some equity out of their home through a reverse mortgage. All are viable options that work and are worthy of exploration.
Gifting money to grandchildren for education
A new form of financial legacy is the gifting of money earlier. Gifting at a time of need versus via an inheritance. While this isn’t a widespread practice, it is gaining in popularity. It could allow your clients to see their legacy in action – a potential win-win if they can afford it and decide to do it.
However, a few words of caution when gifting money for educational purposes versus simply gifting money.
- Money gifted for education should clearly state it is for education. If it is positioned as simply a gift, then it is a gift, and no strings should be attached.
- No tax consequences exist when clients gift money to an adult child. Attribution rules, however, do kick in if the gifted money goes to children who are minors, and any income or dividends will then be attributed back to your clients, who will be taxed accordingly – another good reason to use an RESP over a trust fund for the child’s education.
- Reducing probate costs should not drive your clients’ gifting decisions. The probation costs are minimal compared to the financial issues your estate could face if the distribution was challenged.
If your clients are interested in leaving a living legacy or helping a grandchild fund their education, they may have more options than they realize. While helping your clients set up a RESP is a great way to help, other options, such as a reverse mortgage, may also help.
If you’d like more information about how the CHIP Reverse Mortgage by HomeEquity Bank can help your clients leave a living legacy, contact one of our Business Development Managers.
-Pattie Lovett-Reid
Chief Financial Commentator
HomeEquity Bank
