Generational wealth – passing a legacy on to the next generation

In part one of our three-part series with Shawn Deyell, Chartered Professional Accountant from RLB LLP, we asked you, as Skyline Wealth Management investors, what topics you’d like to learn more about. We received an overwhelming response that you wanted to gain deeper insight into financial strategies for building generational wealth in Canada, and how to manage that wealth efficiently so it can continue to grow. In this article, Shawn shares his knowledge and expertise on building generational wealth. We hope you find it helpful and insightful. If you have any questions about generational wealth planning, please be sure to connect with your tax professional.

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What is generational wealth?

Generational wealth, sometimes called family wealth or legacy wealth, is wealth that is passed from one generation to the next. This could range from providing funds to help pay for a child or grandchild’s education or a down payment on a home to substantial wealth expected to sustain multiple generations to come. If you expect your personal wealth to surpass what you will use in your lifetime, you should consider how to manage generational wealth so you can efficiently pass it on to your loved ones.

Generational wealth is often built over time through some combination of ongoing income streams from a business or employment, investment opportunities or funds to grow your wealth and potentially supplement that income, and controlled spending and savings. The adage about generational wealth goes: the first generation makes it, the second generation maintains it, and the third generation destroys it. You can avoid this unfortunately common situation by understanding how to effectively build your wealth, shelter it from tax (such as through tax-saving investments), and how to pass it on to the next generation.

Managing your generational wealth effectively not only provides you with personal security and freedom, it also gives the next generation a head start on their own financial goals, such as business start-ups, education, or housing.

Steps to secure a strong financial legacy:

1. Clarify your current situation and what wealth you already have or are in the process of building.
2. Understand your goals and what wealth and cash flow requirements you’ll need in the future. This may involve having discussions with a spouse or other family members to understand any of their goals and needs that are linked to yours.
3. Develop a personalized plan around your goals and how to best achieve them.

Involving a wealth or business advisor in developing your plan can be helpful to make sure you have a complete picture of your current situation, ask the right questions, and consider which investment opportunities are the best fit for you. Simply put, a trusted advisor can suggest financial strategies to help you accomplish your generational wealth goals.

A common reason many people delay planning for generational wealth is the belief they have not yet built enough wealth to start this planning. As with other financial goals like investing for retirement or saving for a first home, the earlier you start, the better—but it is never too late. Beginning the process now can help you identify key future milestones or benchmarks, when a change in wealth planning strategy might be appropriate, or how to adjust your plan if your financial status changes. This proactive approach helps you ensure you don’t miss valuable tax-saving and wealth-building investment opportunities.

Best practices for generational wealth planning in Canada

Beyond involving your advisor, several other best practices for generational wealth planning include:

Creating and adjusting your plans to fit your goals, not the other way around. Planning should be driven by you and your family’s goals for generational wealth. Considering the best way to save taxes, for example, should be a factor, but should not be the only consideration where it runs counter to the goals. For example, a designated beneficiary on a registered investment may provide the best tax result, but would not fit where the value of that investment is intended for someone else.

Ensuring your plans are clear, understandable, and documented. This may include well-written wills, net worth summaries that are updated regularly, and summaries outlining structures put in place and how they are to be used. Knowing your own plans is important, but it’s also critical to ensure others can understand and access them if you cannot fully complete them. Estate litigation is an increasing problem that may be minimized through clearly documented plans, saving precious time and stress, and preserving wealth that could otherwise be wasted through litigation.

Building wealth beyond just financial resources. The value of cash, investment securities, real estate, and profitable business ownership are typically areas of focus for wealth planning, but other aspects of wealth should be properly considered as well. The value of a family business may consider factors beyond its possible sale price, such as its ties to family history, its reputation within the community, and the opportunity for employment of future generations. Beyond its market price, a family home or cottage may be valued for the memories and nostalgia it evokes. Also, charitable and philanthropic efforts do not directly contribute to family wealth, but may be considerations in wealth planning, whether formally through a foundation or other structure, or informally as part of your family values.

Educating your future wealth recipients. Financial education is arguably the most effective way to preserve generational wealth. While this may take the form of a financial degree or courses, informal education and communication can be much more important. Anyone transferring their wealth should communicate their plans long before any transfer takes place. This includes passing on knowledge and skills developed for wealth management and wealth building, the intentions for how transferred wealth should be used, and expectations and responsibilities for the next generation on how to preserve or grow wealth they are given. Learn more about transferring wealth proactively instead of upon death.

Factoring in liquidity. Spending some of your wealth and ensuring sufficient cash flow are parts of good planning, even where maximizing generational wealth is the main goal. Plans should consider ongoing expenses and timing for spending on more significant items to allow you to appropriately enjoy your wealth. Investing in illiquid investments with higher returns may not be appropriate where they do not produce sufficient cash flow. For example, a life insurance policy that provides no access to funds until death is ineffective for financing retirement. Learn more about opportunities for investment growth that may be hiding in plain sight.

Building in flexibility and revisiting your plan regularly. Circumstances and goals can change drastically over time. A flexible plan can help to reduce the stress and cost of such changes, possibly preventing the need to unwind your plan and start again. Revisiting your plan regularly allows you to adjust and realign your plan with any new circumstances or goals, so your progress stays on track.

Options to consider when structuring a plan

Family trusts are structures often used to build generational wealth in Canada, with the possibility to hold investments and assets that grow in value over time, and flexibility on accessing that wealth or passing it to the next generation. Another structure is a corporation, which can be used to hold investment securities, rather than holding them in an individual account. This may allow future growth to build for the next generation without triggering tax on the change of investment ownership from personal to corporate.  Similarly, existing corporations may use an ”estate freeze” to capture existing value in shares owned by the current generation and provide new shares to the next generation, which builds future growth. which builds future growth.

These structures can be effective for generational wealth transfer in Canada, reducing estate taxes and often providing the current generation with control over assets or investments. They can typically be put in place without triggering immediate tax consequences. With any structure used, it is important to ensure that it is properly tailored to your individual wealth planning goals—and properly implemented to function effectively while remaining compliant with tax rules and other requirements.

When creating a viable generational wealth building plan that suits you and your loved ones’ needs, it’s always best to consult with a tax professional or your financial advisor to ensure you leave a lasting legacy for generations to come.

Shawn Deyell has been with RLB since 2006 and specializes in tax advisory services. His problem-solving skills and expertise in trust and estate planning services have helped his clients succeed and grow beyond themselves.