Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss 7 crucial steps to follow when you receive an inheritance.
Specifically, we will discuss:
- The emotional impact of receiving an inheritance
- The crucial first step that cannot be overlooked
- Building a team to help sort through your options
- Key considerations for married and common-law couples
- A typical financial importance hierarchy
- A few action items for you to consider
Happy New Year everyone! I hope the first few weeks of 2024 have treated you well and that you haven't strayed from your New Year's resolutions just yet. My wife and I are headed to Mexico at the end of the month for some much-needed relaxation and fun in the sun! More importantly, we want to spend some quality time together before we welcome our second child into the world this May... sleepless nights await!
Today, I will be navigating the complex planning process of receiving an inheritance and exploring the emotional and financial dimensions that accompany the passing of wealth from the Silent Generation to the Baby Boomers.
The word inheritance carries a lot of baggage. Besides the obvious fact that someone needed to pass away for you to receive it, there are also a broad set of emotions unique to this scenario.
Often, when one receives an inheritance, they begin to relive a lot of past emotions, both positive and negative, that the inheritance is tied to. Maybe it's the inheritance of a family cabin or an antique car, or maybe it’s just a dollar amount that represents a final gift to you.
Either way, although we would all prefer our loved one to be present, this is a path we all must inevitably walk.
With that, let’s discuss the 7 crucial steps when receiving an inheritance.
Step 1: Take Things Slow
Your mental health and wellbeing should be your first priority. Everyone deals with grief differently, so take your time and do what feels right to you. Making large financial decisions needs to be well thought out, not done hastily.
If you have to make an investment decision in the short term while you may still be in a state of shock, consider a liquid investment, like a money market fund, high-interest savings, or just leaving it in cash.
Step 2: Check In with the Executor of the Will
Determine if there are any potential issues with the estate that need to be worked out in advance. While most of the estate will be settled and taxes paid before any distribution to the beneficiaries, there are instances when a beneficiary should discuss potential tax issues with the executor.
For example, if you or another beneficiary was named as a direct beneficiary on an RRSP or RRIF, the money would flow tax-free to the beneficiary, while the estate is still liable to pay the tax.
Let’s discuss an example. Take Curtis and Jennifer and their elderly mother Catherine. Curtis is the executor of Catherine's will, while both Curtis and Jennifer are 50/50 beneficiaries of Catherine's assets. When Catherine passes away, she had $1,000,000 in a RRIF. She named both Curtis and Jennifer as 50% beneficiaries, meaning they each receive $500,000.
But here’s the catch: the estate is liable to pay nearly $500,000 in taxes, assuming a 50% tax rate. Curtis, as the executor, is responsible for paying this tax. If Jennifer took her inheritance and spent it all, settling the estate would likely need to come out of Curtis’s inheritance.
I plan on releasing an episode in the near future discussing being an executor, so be sure to subscribe so you don’t miss an update.
Step 3: Make a Plan
Receiving a large lump sum such as an inheritance can alleviate a lot of stress but can also cause friction among family. It is important to take your time and map out the best route.
Engage your Financial Planner, Accountant, and Lawyer. Your financial planner will help you get organized and determine the best way to allocate your resources to pay the least amount of tax while achieving your financial goals.
An accountant will be crucial, especially if there are tax implications involved. Lastly, engage a lawyer to review and update your estate documents and discuss the potential need to keep the inheritance separate from marital assets.
Step 4: Determine If There Are Any Taxes to Be Paid
While there is no inheritance tax in Canada, there are a few scenarios to consider, such as inheriting farmland or a vacation property. For example, if you inherit a vacation property with a fair market value of $400,000 and then sell it for $500,000, you will have a $50,000 taxable capital gain.
If you find yourself liquidating land or property, be sure to understand the tax implications and ensure you keep enough cash un-invested to pay CRA their share.
Step 5: Consider the Impact of Co-mingling Inherited Assets with Family Assets
If you intend to keep the inheritance, whether it be money or property, separate from your spouse, ensure you have clear documentation. While some may suggest keeping the money in a separate account, documenting and keeping proof would ensure the inheritance is not considered a family asset. Completing a marriage contract or cohabitation agreement can protect your inheritance from a spousal breakdown.
Step 6: Revisit Your Retirement Plans
Here is a hierarchy of decisions to consider:
1. If you have a mortgage or outstanding debts, consider paying them off.
2. Keep some cash in savings for emergencies or opportunities.
3. Top up tax-efficient accounts like the Tax-Free Savings Account.
4. If there is tax payable from a property sale, consider an RRSP or Spousal RRSP contribution to offset the tax bill.
5. Consider other tax-efficient investments inside your non-registered accounts. Be diligent about how money in a non-registered account is invested, as there are tax implications for different kinds of investments.
6. If you want to help the kids, consider having them open a First Home Savings Account to help them buy their first home while gifting some of the inheritance to them.
7. If you have charitable intent, consider opening a donor-advised fund to help continue your and your parents' legacy. A donor-advised fund continues to provide benefits to charities of your choice even after your passing.
The importance and relevance of each of these financial steps will depend on your financial situation.
Step 7: Do Something in Memory of Your Loved One
While paying off your mortgage and helping your kids are important, think about your relationship with your parents and do something in their honor. It doesn't need to be big or extravagant. Maybe go back to coffee row and buy your late parents' friends breakfast, or make a donation to their old senior social group.
These small gestures are great ways to keep the memories alive. Creating a tradition is a healthy way of remembering your loved one. It can provide you and your family with a way to grieve and recognize the person's life and their impact on you while allowing you to go on living your life.
Alright, that does it for today’s episode. Here are some action items for you to consider:
1. If your parents are still around, give them a call. Time is a thief, and we never really know how much of it we truly have left.
2. If you have recently lost a parent, take your time and process your loss before making any decisions, financial or otherwise.
3. When the time comes, align your professionals and make a plan.
Thank you, everyone, for joining me today. For the links and resources discussed, please check out the link in the show notes or visit retiringcanada.ca.
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All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.