Seeing the future. Inheritances of tomorrow – enjoyed today!
“We make a living by what we get, but we make a life by what we give.” – Winston Churchill
James and Anita Wong were typical doting grandparents. They had proudly watched their four grandchildren grow from pre-schoolers to high-schoolers and now, the two eldest were about to graduate from university. As the children prepared to embark on their chosen careers, the grandparents thought long and hard about what to give them for graduation.
Together, they had agreed that they were willing to part with some of their grandchildren’s inheritance to purchase them special gifts. Or, as James so aptly put it, “We’re not parting with it, we’re just giving some of it a little early. After all, I’d prefer to be there to see the smiles on their faces.”
BUT HOW TO PAY FOR IT?
They finally decided that the best gift for each of the grandchildren would be a car. They recognized that the young adults would need some freedom of mobility to get around in their new jobs and, in fact, having their own means of transportation could give them even broader opportunities in pursuing their careers.
James and Anita visited the car dealer from whom they had purchased their last three cars and worked out a special deal for the four cars, to be purchased two at a time over the next two years. However, as excited as they were anticipating the reaction of the grandchildren, they had serious reservations about the impact these gifts might have on their long-term retirement plans. While they were “comfortable” in their retirement life, they were not so comfortable that an $80,000 hit to their investment portfolio wouldn’t go unnoticed.
HOME IS WHERE THE HEART – AND MONEY – IS!
That’s when they called in their financial advisor. With her, they reviewed their investments, cash flow, pension plans and short-term savings – they even looked at the cash values in their life insurance. They were struggling to figure out exactly what they could “part with” when their advisor finally popped the question, “How much do you think your house is worth?”
They estimated the value of their home to be around $350,000. The advisor said that, with their assets and good credit history, they could be eligible for up to 50 per cent of the value of their home as a line of credit without having to provide evidence of income. What’s more, by using a flexible mortgage account, they’d not only be able to tap into their home equity to fund the car purchases, they’d be able to pay the account back down (if they wanted to) at a faster rate and for less interest than through a traditional loan.
Their advisor pointed out a number of advantages of going this route:
* Other than interest payments on the loan, their retirement program remains completely intact and uninterrupted (they had not factored their home equity into their retirement income plans)
* There is no disposition of assets, no tax or capital gains to worry about
* They can borrow whatever they need (up to their limit) whenever they need it
* They are borrowing at prime and have the flexibility of paying as much or as little as they want each month – leaving their cash-flow virtually unaffected
* They still have access to additional funds (over $95,000) should the need arise
* Other than the interest, there is no need to pay the principal back on a set timetable – it can simply be paid off from the proceeds on the eventual sale of the house
For James and Anita, any concerns they had about the wisdom of their decision were quickly dispelled the minute the grandchildren saw the cars in the driveway. The looks on the grandchildren’s faces said it all. For the advisor, it was a lesson learned in early-inheritance gifting. Whether it’s to help fund a down payment for a first home for the kids, provide an extra financial boost for a university education or help their children out during a tough financial period, there is a very practical and affordable alternative to cashing in one’s retirement dreams.
And, thanks to their financial advisor, James and Anita realized their goal of seeing the smiles on their grandchildren’s faces. What they hadn’t counted on was the added bonus – their grandchildren seeing the smiles on their faces.
Content provided courtesy of Manulife Investments
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