Helping parents with a real estate windfall

When your parents sell the family home

If your parents have owned their home for a long time and plan to sell, they could end up with a big financial windfall. The appreciation in the property value – especially in BC’s red-hot housing market – means that your parents may soon be sitting on more money than they’ve ever had in their lives.

Before this one-time lump sum arrives from the sale of their home, it’s very important that they have a well-thought out plan in advance. Working with a team of professionals – particularly a financial advisor – will be key. As their child and heir, you are a trusted advisor as well and can play an important role.

Preparing for the emotional journey

Moving is stressful enough, but leaving the home that your parents lived in for decades – one that’s filled with memories – can be even more challenging. Begin by talking as openly as possible about the change that’s about to happen to your parents, and how you can collectively support each other through the process. A straightforward conversation helps everyone begin the journey with complete information and a common understanding.

Discuss the next phase in your parents’ lives. What do they hope to do? What do they need to do? There are many aspects of their new situation that you need to consider. Part of the planning should include discussions with the beneficiaries in the room, so everyone hears your parents’ plans for the money, first hand.

Make sure your parents are cared for

Selling the family home triggers a lot of change in the dynamics of a family. Begin by discussing where your parents are going to live. Will they be downsizing to a condo or moving to an assisted living facility? Will they be moving in with a family member or living independently? If they move to a seniors’ facility, some of the newer communities allow residents the choice to either rent or purchase their home. Which option makes sense for your parents?

As you’re discussing this change of lifestyle, consider whether their new home allows your parent to age in place. Should their health fail, you’ll want to see they will get the care they need. This option provides them and you with added peace of mind.

Define your parents’ goals

This change in living and financial situation makes for a good time to discuss wills, estate planning, and a final legacy. What do your parents wish to do with their money? Do they want to establish a legacy or trust, or fund their grandchild’s education? Do they need to change the terms of their will – perhaps provide for a new charity or great-grandchild? With this money, it’s time to discuss what they need, what they want, and how to best manage the two.

Desires for immediate use

Some parents will enjoy sharing their windfall right away. They may want the money to help their children or grandchildren with a down payment on a home, reducing debt, paying for a wedding, or taking a trip. By sharing the money today, they can delight in seeing the impact it has on the lives of those they love.

A benefit of sharing the windfall through cash today is that there are no taxes to be paid on the money. However, that’s only true when it’s a cash gift. If your parents give you or your children real estate or an investment portfolio, you will be responsible for capital gains taxes. Any gift you receive now, whether real estate, investments, or cash, means that these assets are not required to go through probate at the time of a parent’s death.

Be sure that your parents are clear whether this money is a gift or a loan, whether it’s part of an inheritance, or in addition to an anticipated inheritance. Clarity now can prevent confusion, frustration, and disappointment later.

Another reason to have a frank conversation is to understand whether the gift is for a child, or the child and their spouse. If the asset is defined as a gift for one person specifically, were the couple to split up, the recipient might not be required to share the funds after a divorce. It’s important to consult your financial advisor and lawyer to be aware of any potential pitfalls or issues.

Financing the grandchildren’s education

If your parents want to use some of the money to assist with the cost of education, discuss the merits of Registered Education Savings Plans (RESPs) with your financial advisor. RESPs are a great way to help with the future cost of a child’s education, but do note that the recipient must be less than 17 years of age. Your parents may also want to consider the benefits of starting and funding an insurance policy in their grandchildren’s name(s) to help minimize future tax obligations and provide a financial safety net for the future.

Longer term goals

Another option for sharing the windfall is through a trust. A trust is a legal entity that manages the assets for the beneficiary. A trustee is appointed to distribute these funds according to his or her instructions, so the funds can only be used the way your parents intend. They want the money to be dispersed monthly in equal payments, so that the inheritance can’t all be spent at once. Or they may wish the funds to become available when the child reaches a specific age.

Alternatively, the trust may stipulate how the funds can be used – for education or to purchase a home, for example. Trusts can also help protect assets from marital breakdowns.

While a trust sounds like a great way to ensure that the funds are used according to your parents’ wishes, setting up a trust and administering one can be expensive. Unless there is a great deal of money to disperse, or a specific circumstance such as a disabled child who will need lifelong care, trusts may not be the right solution.

While the sale of their principal residence does not trigger capital gains, they are now required to report it on their taxes. Be sure to inform their accountant of any property sales.

How best to invest the money

Having discussed how they wish to share their windfall, it’s time to consider preserving it as well. Speak with your financial advisor about setting up a predictable, sustainable and tax-efficient income stream to fund your parents’ lifestyle as they age.

Confirm that your parents have taken full advantage of some of the tax-sheltered plans available. Make sure they have fully used any available contribution room in their TFSA (Tax Free Savings Account), since dividend or interest income generated within these accounts is, as the name states, tax-free. And remember that their Old Age Security (OAS) has a claw back provision, so discuss how to best manage their funds amid these tax-related considerations.

Consider consolidation and Power of Attorney

As your parents age, it’s also a time to consolidate investments. Consider simplifying your parents’ finances by closing down smaller accounts to make it easier to track funds and pay bills.

Helping a parent may mean ensuring there is someone designated to act on his or her behalf, if necessary. This would be a good time to set up a Power of Attorney, if it hasn't been done already. If you have Power of Attorney, you are designated to make financial and legal decisions on their behalf. You can receive income, pay bills, and purchase and sell property. However it doesn’t give you the right to make medical or healthcare decisions. For that, you require a Representation Agreement.

Alternatively, you may wish to have signing authority on their accounts, so you can access funds, in the event of illness. This strategy avoids probate concerns when a parent passes away, giving you direct access to funds for such items as funeral expenses. If you’re not comfortable with the responsibility of acting on your parents’ behalf or live too far away to make it work, consider the use of a third-party trust company as an alternative.

Review and update regularly

Once your parents’ estate plan is in place, it's a good idea to revisit it regularly with them, to make sure everything is up to date. If there is a major life event, such as the birth of a grandchild, a grandchild reaching the age of majority, or a death or a divorce in the family, they need to revise their will. You also need to review the will if their named executor moves to a different province. With all items regarding the will, ensure the executor is aware of any changes.

The goal is transparency

You and your parents will ideally meet with your various planners together. In the end, the decisions are your parents; however, they may appreciate having you fully briefed to discuss the options.

How can BlueShore help?

When it’s time to discuss your parents’ plans, contact your BlueShore advisor. He or she will ensure your parents have the right team of experts in place to take care of all their needs, including a lawyer to help draft effective wills, an accountant for tax advice and an insurance specialist to consider how to manage change and protect their wealth. Together, they will get you and your parents on the right path to enjoy the next phase of their lives.