COVER

A TRILLIONDOLLAR WINDFALL

BABY BOOMERS WILL INHERIT TREMENDOUS WEALTH IN THE NEXT 20 YEARS, LEADING TO A BIG SPENDING INCREASE

TOM FENNELL November 5 1990
COVER

A TRILLIONDOLLAR WINDFALL

BABY BOOMERS WILL INHERIT TREMENDOUS WEALTH IN THE NEXT 20 YEARS, LEADING TO A BIG SPENDING INCREASE

TOM FENNELL November 5 1990

A TRILLIONDOLLAR WINDFALL

BABY BOOMERS WILL INHERIT TREMENDOUS WEALTH IN THE NEXT 20 YEARS, LEADING TO A BIG SPENDING INCREASE

COVER

It is a phenomenon that involves a fabulous transfer of wealth—and searing personal tragedies. Over the next 20 years, an older generation of Canadians will pass on nearly $1 trillion to a generation of inheritors, born during and after the Second World War. In 1985, Arlene Perly Rae, wife of Bob Rae, now the Ontario premier, became a reluctant part of that sad but undeniable process. On a warm August evening, her parents, Albert Perly, 72, and Hannah, 62, played golf before leaving in their 1974 Oldsmobile for dinner at a restaurant in north Toronto. Moments later, a speeding Corvette slammed head on into their car, killing both of them. Albert Perly, who had just sold his travel agency to an associate, left his daughter more than $100,000. While Perly Rae’s inheritance did nothing to ease the pain of her loss, it represents the mix of opportunity and tragedy that a growing number of Canadians face as their parents’ assets, built up in the strong post-1945 economy, are passed on. But, said Perly Rae, now 41, “Money is awful when you want your parents back.”

In Canada, nearly $1 trillion, or 50 per cent of all personal assets, are controlled by people 50 years of age or older. Some economists estimate that the real estate holdings alone of Canadians over 65 are worth $250 billion. In the next 20 years or so, most of the wealth of those Canadians will be transferred to their children. The economic implications are staggering. Financial experts predict that the inheritors—a term first coined in 1981 by Maclean’s Senior Contributing Editor Peter C. Newman—freed from debts and flush with new cash, will trigger a spectacular spending boom on everything from palatial homes to luxury cars. They add that it is only through the transfer of so much wealth that middle-class Canadians in the future will be able to enjoy the same standard of living as their parents. But some politicians, such as Perly Rae’s husband, want to tax this transfer of wealth by restoring inheritance taxes as a way of raising revenues and closing the gap between the rich and the poor (page 56). Meanwhile, financial planners are already doing a lucrative business investing the windfalls. Said Dona EullSchultz, an investment counsellor with MT Associates Investment Coun-

sel Inc. of Toronto: “More than 60 per cent of our new business is people in their mid-30s to late 40s who have inherited.”

An innocuous rule in the Income Tax Act—the 21-Year Deemed Disposition Rule—is also fuelling the $ 1-trillion rollover because it specifies that capital gains must soon be paid on thousands of Canadian estates. Specifically, the 21-year rule states that on Jan. 1,1993, capitalgains taxes must be paid on the increase in value of assets, such as stocks and bonds, that were placed in trust before Jan. 1,1972, the year that the first capital-gains tax took effect. Canada’s wealthiest families and thousands of family-owned businesses have billions of dollars in such taxsheltered trusts and, to escape the capital-gains grab, they are swiftly moving these assets to younger inheritors.

Advice: The business of rolling estates over from one generation to another has grown to the point where some financial planners now call themselves inheritance counsellors, offering investment and emotional advice. Some are even trying to convince inheritors to donate large amounts to charities. Increasingly, they say that they are counselling younger Canadians, who, overwhelmed by rich endowments, tend to squander them recklessly. Others help children and parents come to terms with so-called gifting—a practice where living relatives give part, or all, of a future inheritance to their children, sometimes with disastrous results. Said Gary Robertson, provincial manager for Regal Capital Planners Ltd. of Moncton, N.B.: “I’ve seen more [widows] bled by their children lately. We sit here and cringe, but this has become a very noticeable thing. It’s a dam shame, but that’s the way it’s going.” Much of the wealth that will be transferred in the future is controlled by a generation of hardworking, extremely debt-shy men and women. Raised during the Great Depression, they inherited little wealth from their own parents. But largely as a result of a 40-year, almost unbroken climb in housing prices and a booming stock market in the 1970s and 1980s, many people now over 60 have amassed lucrative estates. Said

Kevin Dunphy of Dunphy, Molloy & Associates Ltd., a St. John’s, Nfld., investment house: “We have seen vast amounts go to children and grandchildren in the past five years. Ten years ago, a quarter of a million dollars was a large block of money. Now, it’s half a million or a million.” According to Statistics Canada data and a national survey of 1,350 Canadians over 50, conducted by the Toronto management consulting company Hicks & Co. in conjunction with Toronto-based Kubas Consultants, the average household with one or more people over the age of 50 had nearly $350,000 in assets. On average, company president Ralph Hicks said, those households had accumulated real estate investments worth $150,000, along with cash and other financial holdings such as RRSPs and bonds amounting to $110,000. They also had $75,000 in stocks and investments in large and small businesses, and another $40,000 in a wide variety of other assets. Their average debt was $25,000.

Using Statistics Canada mortality projections, Hicks estimates that 3.5 'Ç million Canadians, representing about í 2.6 million Canadian households with I an average net worth of $350,000, § will die over the next 20 years. Using Í those numbers, Hicks arrives at the nearly $1 trillion that will be inherited. Hicks’s theory is supported by University of Western Ontario economist James Davies, a leading expert on wealth in Canada. Using 1984 Statistics Canada figures on wealth, the latest available, Davies estimates that the average household with at least one member over the age of 50 has assets of $320,000, just $30,000 less than the Hicks estimate. But Davies added that the figure is likely higher, because Statistics Canada excludes valuable financial holdings such as company pension plans, life insurance or the actual contents of houses. But while thousands of Canadians will receive rich inheritances, just as many will go without. Indeed, extrapolating from the same 1984 Statistics Canada figures, fully one-fourth of Canadians over the age of 65 had only $38,000 or less in assets.

Hicks adds that instead of spending their lives’ savings, most seniors are living off interest income and government pensions—leaving their estates largely intact for their children. Added Wayne Walker, vicepresident of Investors Group Inc., a Winnipeg-based financial firm: “It goes against the grain to touch the capital. They still fear the future.” Still, despite the size and implications of the established wealth bubble, leading economists say that it may be even larger than $1 trillion. They point out that very little is known about the total assets held by members of Canada’s richest elite—many of whom will leave massive estates to younger Canadians.

Largest: While the largest inheritors need expert financial and tax advice on how to handle their share of the inheritance boom, financial planners say that most others should follow a simple strategy: pay down their debts. For her part, Perly Rae used her inheritance to reduce the mortgage on her family’s principal residence—bought for $250,000 in 1980—in the desirable Baby Point area of Toronto. She added: “My father was a real saver. He always said to me, ‘Interest is not something you pay, it’s something you should earn.’ ”

As well as cash and property, Canadians are inheriting companies from their parents. In 1983, Llewellyn (Lew) Smith became president of his father’s well-known family food company, E. D. Smith & Sons Ltd. of

WOMEN HANDLE INHERITED WEALTH MORE RESPONSIBLY THAN MEN

Winona, Ont., located 19 km east of Hamilton. Even though his father was still alive, and Smith was then only 30, he received 100 per cent of the company’s common stock through a trust. But the windfall carried a high price— the psychological pressure of ensuring that the family’s business, which has annual sales of $65 million, continued to prosper. Added Smith: “I could never live knowing I did not give it my best shot.”

Leisure: Rich legacies can also bring major lifestyle changes. For large inheritors, it provides the choice of continuing to work or assuming a life of leisure. That is the choice that now faces Gordon Wagar. In 1983, he inherited his father’s 300-acre cattle-breeding operation on the picturesque rolling hills near Newburgh, Ont., in the Kingston area. After struggling to make a living on the farm since 1983, Wagar says that he will now do what many baby boomers who inherit family farms do—sell out and retire. Said Wagar, who has one son with his wife, Glenda: “If I can get between $600,000 and $1 million for it, I will put it in the bank at the best interest rate available, and live on the income.” Added his wife: “I would like to be able to go into a store and not worry what things cost.”

Still, like many middle-class inheritors, Glenda Wagar, who was recently laid off from her job as a forklift operator at a nearby Celanese Canada plant, is unable to completely shake the work ethic that has ruled her life for so many years. In fact, she says that she would like to go back to work, even if she could live comfortably

for years on her family’s inheritance. She added: “Really, I would rather work now that Kevin, my son, is older. You should try and do as much with the money as you can. It would be

nice if our child got some of it, too, later on.”

Other, far richer Canadians, faced with the capital-gains implications of the 21-Year Deemed Disposition Rule, also want to protect their children’s inheritances. Harold Shipp, 64, the chairman of the family-owned Mississaugabased development firm Shipp Corp., says that he has been studying the capital-gains tax implications of the 21-year rule for years. In the late fall of 1987, Shipp, his wife, June, his three children, then aged 30 to 36, trustees, financial advisers and lawyers met at an exclusive resort. There, they decided what should happen to the children’s inheritance, which included assets in the family trust. Recalls Shipp: “It was a very frank discussion. This was a 20-year trust that wound down. We were preparing for another 21-year trust. The trustees took out the assets and gave them to the beneficiaries. Then, it was ‘Roll me over, roll me over.’ ”

Escape: While the fortunes of wealthier Canadians like the Shipps grow in tax-sheltered trusts, for most middle-class Canadians inheritance may be the only way to escape an evertightening debt squeeze. According to Statistics Canada data, average Canadian family debt increased almost fourfold to $15,436 in 1984, the latest year for which figures are available, from $4,161 in 1970. And leading economists estimate that debt has been steadily climbing since then. Said Steven Murray, assistant vicepresident of estate and trust services at Canada Trust in Toronto: “People like to think they will have a lifestyle of luxury, with sailboats and other benefits, when they inherit. But the inheritance just disappears as they pay the debts down.”

For many other debt-saddled Canadians, an

Average assets of households headed by people over 50 years of age in Canada

Real estate:

$150,000

Cash and financial holdings, including RRSPs, bonds and bank deposits:

$110,000

Equity in businesses, including stocks:

$75,000

Other assets:

$40,000

inheritance is the only way to finance a comfortable retirement. Leading financial analysts say that, for many members of the baby boom generation using most of their disposable income to pay down their mortgages, inheritances represent their only chance to build the nest egg that they failed to accumulate on their own. Added Ronald Hatcher, regional manager with the Investors’

Group in Halifax: “The majority who inherit are looking for alternative ways to continue having this money work for them.”

Many younger Canadians who just want to spend their inheritances on the good life are facing growing resistance from their more frugal parents.

In fact, some parents are disinheriting their children in favor of their grandchildren—in some cases, locking the inheritance away for years. Said Toronto tax lawyer Maurice Cullity:

“People are increasingly concerned about passing wealth to children. People are creating trusts that postpone vesting until age 25, 30 or even 50.”

Trusts: Grandparents are often justified in locking money in trusts and out of the reach of their children.

Hicks says that older inheritors usually know the most profitable ways of investing and handling the money and assets that they receive, but younger Canadians are more reckless. Added Toronto family lawyer John Lowndes:

“Most young inheritors take their money and boom—it’s blown. If you buy a Ferrari, then $200,000 is not a lot of money.”

Despite the nearly $1-trillion inheritance rollover, the assets held by many senior Canadians continue to grow in value in a variety of lucrative tax shelters. Paul Delaney, a financial adviser with T. Delaney Inc., a Toronto investment house, says that flexible new registered retirement income funds (RRlFs) allow seniors to escape taxes while adding to their estates.

Unlike annuities, which usually pay equalized retirement income payments, minimum-payout RRlFs allow smaller payments, so that a larger portion of the estate remains protected and growing in RRIF tax shelters. Says Delaney: “It is amazing how so many of the RRlFs we see are sixand sevenfigure sums.” In fact, Delaney says that it is not unusual for Canadians over 60 to have an average of $100,000 saved in RRSPs of all types, up from around $50,000 in the mid1980s. Hicks adds that Delaney’s $100,000 RRSP estimate is similar to the results of his own survey, which found that the average Canadian over 50 had $110,000 in financial holdings— including RRSPs and other investment vehicles such as income funds.

While Canada has had no inheritance or wealth taxes since 1972, there is a capitalgains tax that comes due at the time of death.

Still, even though many capital-gains loopholes have been closed in the past decade, some inheritance gains go largely untaxed as they are passed on through such vehicles as parentchild jointly held residences and gifts of property. Indeed, rich Canadians can even escape

Canadian taxes by shifting financial assets abroad.

Meanwhile, a growing number of financial planners are being called upon to deal with children who want all or part of their endowments before their parents die. And such demands can destroy a family. Beatrice Boracchia, a Toronto psychiatrist who has counselled troubled inheritors, says that children often resent their parents’ concerns over how the money will be spent. Said Boracchia: “They

want to talk freely to their parents about the parents’ wealth, but it causes anger and resentment on the parents’ part.”

Men and women also differ in their reactions to sudden wealth. For the most part, Boracchia says, in her experience female inheritors are more responsible than men after receiving large inheritances. She said that a woman’s first reaction may be to purchase expensive consumer goods because she wants to feel the power and freedom that money can provide, but that is a short-term phenomenon. Recalled a 44-year-old Toronto teacher, who declined to be identified, on her reaction to a $500,000 inheritance: “I bought hot red towels and grey towels and white wool blankets and Bill Blass sheets. Then, I had a crying fit.”

Men’s reactions also tend to be complicated. Boracchia said that men often become sexually aggressive when they suddenly get more money. She added that she knows a 32-yearold Toronto lawyer who received a large inheritance, then behaved in ways that led to the breakup of his marriage and the loss of his house and law practice. Said Boracchia: “Money is a horrendous weapon. We forget who people are because of money, and that is sad.”

Benefit: Meanwhile, representatives of charities say that they hope some causes will benefit from the large pool of wealth being passed on to younger people. They contend that they may be able to tap the inheritors’ generosity to create a major source of charitable funds. Investment counsellor Eull-Schultz says that she is planning to work with inheritors and young high-income earners to set up a Canadian foundation to funnel wealth from rich inheritors into community projects. She says that she helped a similar group in Minneapolis called the Headwater Fund, which attracted inheritors who wanted to resurrect the social values they believed in in the 1960s. Said Eull-Schultz: “In Canada, I there is a real awakening happening,

0 too. People went through a materialiss tic phase, and now there is a sense of

1 charitable giving.” Added Ismo Heikkila, a vice-president with Toronto's

ECC Group of financial consultants: “I see longer-term social benefits for Canada as baby boomers recognize that they have enough and that maybe they should put something back into the community.” But most of those lucky Canadians who eventually do receive an inheritance will splurge only a little on expensive consumer goods, and use most of their windfall to pay off their debts—a move that no doubt would please their frugal parents.

TOM FENNELL with ANN WALMSLEY in Toronto and GLEN ALLEN in Halifax

ANN WALMSLEY

GLEN ALLEN