An inheritance is not often received in the happiest of times. While mourning the loss of a loved one or dealing with family politics, it can be challenging to think clearly when faced with an influx of money.
One of the biggest mistakes that people make, say experts who deal with family inheritances, is acting abruptly, leaving themselves in a position they come to regret later. Patience and a well thought-out plan can help ensure any newfound wealth is used wisely.
With the great wealth transfer under way in Canada, Chartered Professional Accountants (CPA) estimates about $1-trillion will pass from baby boomers and their preceding cohort, the Silent Generation, to Gen X and millennials between now and 2026. CPA estimates it will be the largest generational wealth transfer in Canadian history and could have considerable downstream impacts on the country’s economic landscape.
For those on the receiving end of this transfer, Parveen Karsan, a tax, trusts and estate planning lawyer at McQuarrie Hunter LLP in Vancouver, said before spending any of their inheritance they should double-check that the estate they received it from is in the clear with the Canada Revenue Agency (CRA).
Beneficiaries can check this with the executor, who should receive a clearance certificate from the CRA before distributions are made, Ms. Karsan said. Generally speaking, this certificate is a good indicator to beneficiaries that they can be confident any debt owed by the estate to the CRA has been cleared.
However, she added there’s always a slight chance something comes up later, in which case the CRA may track down a beneficiary to help settle the matter.
“Generally speaking, the more time put between the passing of the deceased and the time the beneficiary starts spending the money, the safer the beneficiary is going to be.”
Upon receiving an inheritance, Brent Davis, an associate at ZLC Financial Inc. in Vancouver, said he commonly sees people make one of two mistakes. Either they’re older and become afraid to invest the wealth because it’s needed to support their retirement, or they’re younger and spend it too quickly.
“I’ve seen people go through hundreds of thousands of dollars, if not more, because they got access to money when they probably weren’t ready to,” he said.
On the other hand, Mr. Davis said sitting on the cash and not investing it means losing purchasing power over the long term, owing to inflation.
To avoid these two extremes, Mr. Davis said it can help if the person passing on an inheritance has a conversation with the person receiving it before their death, so the money doesn’t come as a surprise.
“The more you involve your beneficiaries or your family members in these discussions about what would happen in the event of x, y or z, the better everyone’s going to be set up for success,” he said.
If someone is expecting an inheritance but is unsure of what to do with it, Mr. Davis said there are a few good options depending on when they want to use it. “The cardinal rule is money is only good for when you need it,” he said.
For example, if someone wants to use their inheritance within six to 12 months to buy something, such as a house, storing it in a savings account is a good option. Whereas if someone intends to spend it in one to three years time, investing it into a mutual fund or exchange-traded fund might make more sense, Mr. Davis said.
“Anything beyond that, that you don’t think you need over that three-year period, you want to take more of a long-term approach to make sure that you’re investing it,” he said.
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