Expecting an inheritance? The more you know, the better you can plan
What do I do with a surprise windfall of money?
Darren Robinson, Financial Adviser in Barrie can assist you make the right decisions with an unexpected lump-sum of money.
Sudden financial fortunes may not be expected but how do you ensure that you don’t make a big mistake and burn through this windfall? To make the most out of this financial gain, as it relates to inheritance, how do you know if you’ll be impacted by tax implications, special obligations or other considerations?
What do I need to think about?
You will need to consider these three questions:
- How do I protect & grow these funds?
- What are the tax (capital gains) rules surrounding an inheritance?
- Specifically, what can I do with inherited property? If I sell will I have to pay capital gains tax?
How I can assist
If you inherit items like money, property, stocks or even antiques, then there could be tax complications. I can analyze these situations and help you better comprehend any problems before they pop up. I’ll also be sure to provide you with the best advice and walk you through the process so that you never feel overwhelmed.
I can:
- Review your current situation and set an achievable financial plan.
- Figure out the best way to handle tax implications.
- Provide you with the best growth options of your liquid assets.
- Identify the best local professionals when specialized advice is required (accountant, lawyer, etc.)
How to Handle an Inheritance
While receiving an inheritance likely sounds like a pretty rosy situation, many find that it can be a negative experience.
The average inheritance in Canada is in the range of $175,000, most of the heirs don’t know what to do with this sudden wealth. It’s found that about 33% of inheritors long-term financial situations don’t improve or even decline after a sudden windfall.
You are likely asking, “How can that happen???”. How can someone’s financial health decrease after such a positive influx of wealth. Too many people immediately “spoil” themselves with trips, cars and expensive toys. It doesn’t take long to burn through the funds and have little to show when they are done.
Wouldn’t those funds be better spent eliminating debt, investing in their retirement or even wiping out their mortgage?
This money could impact several generations if it is managed properly. So why wouldn’t you do your best to preserve this wealth?
Where do I start when I receive an inheritance?
Don’t rush… there is no reason to make any quick decisions. Take time to mourn the passing of your relative. It’s likely that your head won’t be in the right shape to make smart choices with the inheritance right away. Don’t be afraid to park the funds in a money market account for a month or two.
Assemble a Solid Team of Professionals
After you receive your inheritance you’ll receive lots of advice from friends and family. However, make sure you look to find independent professionals that are experts in their fields. You’ll need to pull together a solid group of advisors who can walk you through the inheritance process. Here is a list of the various professionals that help:
- a Chartered Accountant (CA) or Chartered Professional Accountant (CPA)
- an insurance agent
- an investment professional
- an estate planning attorney
- a tax attorney
- a real estate agent
What Do I Do With a Cash Inheritance?
You have three basic options for the money: donate, invest and spend. You should treat this process no different than you would a monthly budget. You’ll need to account for every dollar.
- Donate some — giving could be an important component in your plan. Some will give up to 10% to their favourite charity or a local non-profit in the deceased or your own name.
- Wipe out debt — If you have been sitting on some suborn debt, then it would likely be best to tackle this right away. It would be a good idea to focus on accounts with higher interest rates first (credit cards & lines of credit).
- Assemble an Emergency Fund — It is always recommended that you have at least 3 to 6 months of income sitting in a high-interest savings or money market account. Generally, you don’t want an emergency or emergencies to dig into your investment & throw you off your retirement plan.
- Pay Out your Mortgage — For some people, paying out your mortgage might be a good move. As a result, this could free up some monthly cash flow for families that have been struggling to make ends meet.
- University or College Fund — You can either start or add to your child’s RESP fund. The government will allow you to over contribute to catch up on some grant money. Post-secondary education continues to get more & more expensive and the expense is growing at a much faster rate than annual inflation.
- Put some aside for yourself — It’s fine to set a small amount of the inheritance to the side to have some fun & be a little frivolous. Or maybe a home renovation makes more sense? Just make sure that you take care of the above suggestions first. Starting with this step could derail the whole process.
Where Do I Invest my Inheritance?
After you’ve topped up your tax-free (TFSA) and tax-deferred (RRSP) accounts you’ll need to look at other ways to invest your inheritance:
1. Mutual Funds
Investing in well managed mutual funds can help diversify your investment. Look to spread your money across a variety of different mutual fund types: growth, growth and income, aggressive growth, and international will help you limit your risk.
2. Real Estate
There may be enough money in your inheritance that will allow you to focus on an investment property. There are great opportunities in the commercial & residential rental market. However, you’ll need to find a real estate agent to find the perfect property.
Get the Most of Your Inheritance
You will likely only receive one inheritance in your lifetime, so don’t squander your opportunity. Don’t go it alone, you’ll regret you did. Let your team of professionals do all of the heavy lifting so that you get it right.
Patience is a Virtue but, How Long Do You Wait For Your Inheritance
The reluctance to have a conversation between the generations regarding inheritances may be the reason for poor retirement and estate planning. Obviously, there is the uncomfortable topic of death, but there is also the discomfort of talking about financial issues.
A HomeEquity Bank survey completed years ago showed 1/3rd of Canadians are expecting an inheritance to fund their retirement 45% are not expecting an inheritance and 20% aren’t sure.
Additionally, the survey found that 94% of adults over 45 want what’s best for their parents and are willing to sacrifice half of their inheritance in order to improve their parents’ lifestyle. This is “half” of their inheritance, not “all” of it. This is not because they are selfish, it’s because they actually need the money.
Boomers, unfortunately, are not well prepared for their own retirements and are anticipating an inheritance to reduce their debts as well as maintain their lifestyle. Many parents/seniors want to leave something behind for their children. However, first, they have to fund their own retirement. There is an episode on “Seinfeld” where George believes he’s going to inherit thousands of dollars from his parents as they have always lived so frugally. Then, his hopes are crushed when he sees them walk into a fancy restaurant and they tell him they’ve decided to “blow it all.”
HomeEquity Bank found that 62% of the surveyed group reported they aren’t as concerned about leaving behind an inheritance for their children. Their own needs must be taken care of first and are comfortable wanting to enjoy their retirement. This sentiment increases with Canadians over 65 (which is 71%) because they are already experiencing increasing expenses.
It’s worth noting that people are now living longer. Census data shows that the number of people living past 100 is increasing every decade. As the parents get older, the more money that is needed to finance their lifestyles – health-related costs, daily assistance living. Some even have to tap into their home equity to increase their financial resources.
Many Grandparents pay for their grandkids education as well as joint vacations with their own children. They help family members buy homes, or cars, or even pay off debts. Boomers are frequently using their own potential inheritance to fund the care of their own parents.
Financial advisors all agree it’s important for families to talk about their finances. It is easy to understand the older generation is uncomfortable disclosing their details, and their adult children, from their perspective, are fearful of appearing greedy or cold. But, families need to establish realistic expectations. In an HSBC study, the benchmark for an inheritance was just over $77,000. That amount won’t certainly fund retirement for very long. It’s better to have the talk than leaving it all to chance.