John Smith, 27, the son of one of your favourite clients, just got married. As part of his wedding present, his parents gave him a lump-sum cash gift. Should he use the money to place a down payment on a home or pay off his massive student debt?

If John is like most young newlyweds, says Jean Richard, vice president and consultant with Toronto-based BMO Nesbitt Burns Inc.‘s wealth-management group in Montreal, these questions may not have crossed John’s mind. It is likely to be his parents – your clients – who will be asking for your help in teaching John and his new wife the basics of financial planning, especially when large cash gifts are involved.

“Clients want to be sure that their children aren’t going to squander a large financial gift,” Richard says. “The more high net-worth a client is, the more complex the distribution of that gift could be.”

Young newlywed couples who lack investible assets may not seem like the most desirable of clients. But as the children of your clients, these couples represent an excellent opportunity to maintain your assets under management by connecting with the next generation. “This is the best way,” Richard says, “to start a multi-generational practice and help keep financial assets in the family.”

Here are some key areas you should discuss with newlywed couples to set the stage for a long-term relationship:

1. Defining short- and long-term financial goals. According to Bank of Montreal’s 2013 Wedding Survey, 62% of married couples wish they had talked more about their financial situation and goals with their partner before getting married.

“Most couples are so focused on budgeting for the wedding, they don’t get to the bigger picture,” says John Bostjancic, a financial advisor with Mississauga, Ont.-based Edward Jones. “As the advisor, you want to help steer them in the direction of thinking of a longer-time horizon.”

If the bride and groom are lucky, they may end up with a surplus of $5,000-$10,000 after wedding expenses are paid. The key is for the young couple to prioritize their goals, says Brad Mol, senior wealth advisor with TriDelta Financial Partners Inc. in Toronto, then use this money strategically: “Their first priority should be using the money to pay off any type of debt. It’s very hard to build a new life together if any of the parties are still trying to pay off debt.”

Once the debt is dealt with, longer-term goals, such as building wealth through buying a home or investing, can come into play. Retirement, at this stage, is something newlyweds should be educated about, but the topic isn’t likely to become a focus until they’ve bought a home and had children.

When setting out goals and outlining the road map for achieving them, it’s likely that both parties will need to make concessions.

“As an advisor and the neutral party,” Bostjancic says, “your job is to help the partners find a middle ground.”

2. Buying the first home. If a newlywed couple is fortunate enough to be starting off their new life together without any personal debt, they are likely to be focused on saving to buy their first home.

Newlyweds living outside their parents’ homes for the first time may be struggling with budgeting for daily living. Adding the costs of home ownership into the mix, such as property taxes and unexpected repairs, could mean the couple has to cut back on such costs as travelling and entertainment.

“You want to help keep a couple’s expectations for owning a home realistic,” Mol says. “It has to be affordable, but also fit their other lifestyle needs.”

A young couple saving up to make a down payment on a home will have to consider which type of account is best for their needs. Should they put their money into an RRSP or a tax-free savings account (TFSA)?

Inform your clients that under the Homebuyers’ Plan (HBP), funds in an RRSP can be withdrawn without any tax consequences if they are put toward the purchase of a first home. Those funds must be repaid into the RRSP within 15 years, or taxes will be charged. In contrast, funds saved in a TFSA can be withdrawn for any purpose without any tax consequences and do not need to be replaced in the TFSA.

“The decision they make,” Mol says, “is likely to depend on their cash-flow needs, their current tax rate and what tax rate they think they will earn in the future.”

For couples with a marginal tax rate of 31% or higher, participating in the HBP may make more sense, says Mol; for couples with a lower marginal tax rate, a TFSA may be the better choice.

3. Protecting current wealth. Although newlyweds look forward to a bright future, it’s up to their advisors to ensure the couple plan for an unexpected misfortune.

An emergency fund is a “no-brainer,” Richard says: “The funds should be held in an account like a TFSA, where the money is easily accessible.”

A common rule of thumb, Mol says, is three months’ take-home pay. If the couple has yet to build cash reserves, a line of credit is an alternative form of protection.

Life insurance also is critical for newlyweds, especially when the couple own their home or have a child, says Bostjancic: “A life insurance policy can alleviate financial pressure, should there be a loss of life.”

And when there’s a young child involved, Richard says, wills and estate planning also become an essential part of the overall financial plan.

4. Protecting against marital breakdown. Although newlyweds understandably don’t want to consider the possibility of divorce, their higher net-worth parents should. The breakdown of a child’s marriage could mean significant loss of an affluent family’s assets, Richard says: “I’ve seen cases in which a client has given a gift, such as $500,000, to their child for a home. Then, the marriage breaks down a few years later and the child is left with $250,000.”

To protect family assets, Richard suggests clients seek advice from a legal professional before giving a substantial gift of cash or real estate to a married child. They should consider structuring gifts as trusts or loans in their child’s name.

© 2013 Investment Executive. All rights reserved.