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What To Do With an Inheritance

Make the most of your inheritance with these financial tips.

Inheritance - Diminish Debt Darren Robinson

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:

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.

what_to_do_with_inheritance_feature

At first, it may seem like a silly question; receiving an inheritance would be a welcome financial windfall, despite the sad circumstances. For most of us, even a small amount could make a big impact and reduce some of the financial stress we tend to carry around with us. However, it’s important to carefully plan for an inheritance or it may just slip through your fingers. Here are 4 helpful tips to keep in mind if you are expecting an inheritance:

  • Stop, think & wait

Gaining an inheritance usually means we’ve lost someone very close to us, and dealing with grief, their estate or personal belongings, a funeral and other family issues are important things to manage. Taking time to process everything and begin making a financial plan is recommended; there is no need to rush. You may find that the amount is less or more than originally thought, in which case you may need to re-group. It’s also not a good idea to promise other people money, spend lavishly or to make elaborate plans at this stage. Just wait.

  •  Deal with debt

No, it’s not exciting or sexy, but one of the first things to do with any windfall is to assess your current debt load. If you’re paying a lot of interest, it makes sense to tackle that debt and interest payments so that you keep more of your money. If, however, you only carry a small mortgage with a low-interest rate, you may decide on leaving your mortgage alone and investing your money elsewhere that could yield higher interest. For anyone who owes money on various credit cards and loans, consolidating everything into one loan that has lower interest rates may be beneficial, and then you can make a large payment against it. Getting that weight off your shoulders can be life-changing and you’ll likely find yourself with fewer sleepless nights.

  • Set aside fun money

If you’ve always dreamed of having a vintage Harley Davidson or a trip to Paris (and funds are aplenty), then, by all means, go for it. However, it’s important to set aside a specific amount for fun and spending…once the debt and other financial obligations have been adequately met. A frighteningly large amount of people blow all of their money in the first few years of receiving a lottery win, inheritance or other windfall and end up right back where they were, with nothing to show for it except for maybe a few extravagant items and some ticket stubs. If you’re at all worried about spending it too quickly, there are accounts and investments you can get that lock in your funds or make it harder to access; be sure to talk to a financial planner or your lender for advice. Also, before gifting your inheritance to others be sure you’ve secured your own financial future first.

  • Diversify

For most Canadians, our financial goals include paying off our mortgage and other debt, having a solid retirement savings plan, and having an emergency fund. If you’ve received an inheritance, you can split it up to help make a dent in achieving all of those goals, and hopefully, you set a little bit aside for making special memories. It’s also important to diversify your investments so that you aren’t putting all your eggs into one financial basket. You will likely want to max out your TFSA, RESP, RRSPs and so on. Do your research and talk to an accredited financial planner to ensure your inheritance money will be working for you.

Finally, take care of the money you were willed; doing so helps to honour the deceased and recognize that they likely worked hard to earn and save that money. Blowing it all on fast and fleeting items may sound intriguing and fun, but having a safety net, reduced debt and sound investments to carry you into retirement and beyond is an admirable goal. If you’d like to learn more about managing an inheritance, investments, retirement planning, debt-reduction strategies and more, be sure to connect with me. I’ve got the experience and financial know-how to help you navigate the various ins and outs of financial planning and offer sound advice. Call me to book an appointment at 705-315-0516.

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