Don't be one of the third of inheritors who see their inheritance wealth decline
We are entering the greatest intergenerational wealth transfer in our history as the baby boomers prepare to exit and hand their life’s savings to the next generation. In fact, there are estimates that $68 trillion worth of assets will pass from the baby boomers to their offspring in the next 25 years.
You could be fortunate to receive some of that money – but then the question becomes what to do with it. The last thing you want is to squander it in some frivolous way, so it goes to waste. The best thing you can do is work with your financial advisor to develop a plan to make it work for you. That would be wise since some statistics say one-third of all inheritors see no change, or a decline, in their wealth after they get an inheritance, and you DON’T want to be one of those.
- What is an inheritance?
An inheritance is property or possessions that parents, or others, can transmit to their children or others whom they name in their wills.
- Is there an inheritance tax in Canada?
There is no inheritance tax in Canada. Instead, after someone dies, his or her executor must prepare a final tax return for any income the person earned up to the date of his or her death. Any money owing is paid from the estate assets before the remaining funds can be transferred to the person’s beneficiaries. Those should be named in a will that the person has prepared before dying.
- Do you have a financial plan?
When you inherit money from a loved one, you may still be working through your grief and not ready to make financial decisions. So, talk to your advisor about how you can best put it aside until you are ready. Then, you’ll want to work with your advisor to make, or update, your financial plan, so it reflects your latest financial goals as well as how your inheritance can help you meet them.
There are then five steps you can take to make your new money best work for you.
- What should you do first?
○ Pay off your debts: If you have any debt that you would like to pay off, use part of your inheritance to eliminate as much as you can. Talk to your advisor about what would benefit you most. Depending on your circumstances, paying off a mortgage might be included in that.
○ Build an emergency fund: If you don’t have one already, you should ensure you put away three to six months’ worth of expenses to help you manage everything from major emergencies to minor inconveniences that could cause a hardship if, for some reason – like the recent pandemic – you lost your job or had to live on a reduced income.
- How should you invest your inheritance?
○ Invest in a diversified portfolio: Work with your advisor to develop a financial portfolio that reflects both your financial goals and your risk tolerance. Given what has been happening in the market this year, the traditional 60/40 portfolio, which contains stocks and bonds, may not be your best bet right now. You should talk to your advisor about what kinds of other investments, such as alternatives (such as real estate, gold, or even fine wines), could give you the best return. You may also want to reflect social values that are important to you by investing in environmental, social, and governmental (ESG) mutual funds or exchange-traded funds (ETFs) that help you do that. Those could reflect race, gender, or climate issues, to name just a few. Your advisor can also recommend funds that are either actively or passively traded to ensure that you get the best benefit from portfolio managers either changing them regularly or leaving them to sit for awhile.
○ Take advantage of all available tax breaks: Here’s another area where you’ll want to work with your financial advisor to ensure that you receive all the tax breaks that are available to you This will include putting money in registered retirement savings plans (RRSPs), tax-free saving accounts (TFSAs), or registered educational savings plans (RESPs) for your own offspring’s post-secondary education. There can be tax breaks if you’re a first home buyer or have a disability. Some of these also have matching government grants, up to a point, so ensure that you inform your advisor about your particular situation, so he or she can make the best recommendations to minimize your taxes.
○ Purchase a property: You could work with a real estate professional to buy a home or even a rental property that can provide you with further income. But, discuss this option with both your real estate agent and advisor, particularly if you’re wondering about buying a rental property as those supportive professionals can look at your current finances and inheritance and help you decide if one of these is your best option. If you buy a rental property, it will cost you time and money as well as generating that extra income. So, if you take this route, you need to be prepared.