If you hope to leave something for the next generation, the first question may not be which planning tool to use. It may be when and how you want that money to make a difference.
As their own retirement plans become more settled, many families begin thinking about their children and grandchildren. At a recent iA Leader Summit professional-learning session, Guaranti’s wealth team considered an intergenerational legacy case. Its lesson was not that one tool is better than another. Three arrangements that appear to do the same thing actually answer different questions.
This is not simply a choice of three options. Each addresses a different planning need.
First: Give now or transfer later?
An outright gift is the most straightforward to understand. Once ownership has transferred, the recipient can own and use the asset. It suits a goal of completing the transfer now.
But if the beneficiary is young, or the family hopes the money will be available for education, a first home or a later life stage, the question is not only whether to give. It is when.
With a completed gift, ownership and control generally pass to the recipient. The giver has much less scope to decide when or how the money will be used afterward.
Second: If not now, who will manage it?
This is where a trust may enter the conversation. A trust is not simply a way to “lock up” money. It is a legal arrangement that can define who manages assets, who may benefit and the conditions under which distributions are made.
Nor is a trust an automatic answer for every family with significant assets. Establishing and maintaining one can bring administrative work, tax filings, accounting and legal costs. Reporting requirements can change, and an existing trust may need to be reviewed as family circumstances and goals evolve.
The more useful question is not “Do we have a trust?” It is:
Does this family need an ongoing framework for management and distribution?
Third: Insurance addresses uncertain timing
Investment plans need time to develop, but the moment at which a legacy is needed cannot be scheduled. If a plan was meant to build over decades and death occurs earlier, the intended amount may not yet have accumulated.
Life insurance is not a substitute for investing. It addresses a different question:
If the transfer happens earlier than expected, will funds be available for the family?
Subject to underwriting, a policy remaining in force and its specific terms, life insurance can provide a contracted death benefit when the insured person dies. It can help address the timing risk within a longer-term plan.
Viewed together, an outright gift focuses on transferring now; a trust focuses on management and rules; insurance focuses more on risk and uncertain timing. They are not necessarily mutually exclusive choices.
Guaranti perspective: Define the purpose first
A common legacy-planning misstep is to hear about a tool and then look for a reason to use it. We would begin by separating the goals:
- Should the wealth transfer now or in the future?
- Does the next generation need an ongoing management arrangement?
- If the transfer happens sooner than expected, is there enough liquidity?
Once timing, management and risk are considered separately, it becomes clearer where a gift, trust or insurance might fit.
Define the purpose, then choose the structure. The tool is not the answer; the fit is.
This discussion draws on a generalized intergenerational-planning case used for professional learning at the iA Leader Summit. It is not a Guaranti Group client case. This article is for general information only and is not investment, insurance, tax, accounting or legal advice. Any arrangement should be assessed against applicable law, policy terms and personal circumstances with appropriate professionals. For general information about trust filing and life-insurance beneficiaries, see the Canada Revenue Agency and the Financial Consumer Agency of Canada.
First published on Guaranti’s WeChat account.