Grieving a loss: How to manage the inheritance of an estate

19 November 2020 by National Bank
Inheritance money

Losing a loved one is difficult. What’s more, receiving a large sum of money as an inheritance can lead to many questions. Should you set some of it aside to pay for the funeral? Is inheritance money taxable? What’s the first thing you should do with this money? How can you use it to help your family? Which investment vehicles should you prioritize? Our expert is here to answer these questions and share his advice. 

In 2012, the average amount of money inherited by families in Quebec was $82,100. In the rest of Canada, this figure is much higher: up to $153,900 in Alberta, $137,800 in British Columbia, and $113,000 for Ontario. In 2012, the percentage of Canadian families having received an inheritance was around 28% across all provinces in the country. 

1. What’s the first thing you should do with inheritance money?

“Before you think about how to treat yourself, take the time to evaluate your needs and priorities,” explains Steve Mc Cready, financial planner at National Bank. “This obviously varies from one person to another, depending on how much they inherited and their financial situation. Age, savings and debt also factor into this.”

“I wouldn’t give the same advice to a young 30-something who just bought a house as I would to someone on the cusp of retirement whose mortgage is paid off. Their goals are totally different. Regardless, one piece of advice I’d give to anyone is that before you make any major purchases or investments, you should pay off any expensive debts. First, pay off any high-interest personal debts like lines of credit, loans and credit card balances. Low-interest debts, like student loans, and debts with tax-deductible interest (like money you’ve borrowed to invest) are less of a priority.”

2. Which investment vehicles should you prioritize?

“You can invest your inheritance across different vehicles. I usually suggest maxing out your Tax-Free Savings Account (TFSA) first. After that, it would be a good idea to contribute to your registered retirement savings fund (RRSP). Married couples should keep in mind that RRSPs are automatically included in the family patrimony, so your spouse can have a claim to it if you separate.”

“If you have children or grandchildren, the registered education savings plan (RESP) is definitely something to look into. Finally, if you already contribute to these investment vehicles, you could consider buying an annuity, which would give you another regular source of income, or even buy personal insurance. Feel free to get advice from a protection expert for this,” Steve Mc Cready suggests.

3. How long should you wait before making a decision?

“In most cases, if you inherit money, that means you’ve lost a loved one. This kind of situation may involve a certain level of vulnerability that can sometimes lead to impulsive decisions,” says Steve Mc Cready. But generally, it takes time for estates to be settled. The whole process can take several months, or even more than a year. You’ll have plenty of time to both think about the ways you’d like to optimize your inheritance and to consult your advisor to find out whether it’s a good strategy. The bigger the inheritance, the better it is for you to seek advice and consider different strategies. Avoid acting spontaneously, but keep an eye out for any investment opportunities.

4. Should you set aside some of the money to pay for the funeral?

“Usually, no,” Steve Mc Cready answers. “Funeral costs are usually paid for using assets from the deceased’s estate before it’s divided among their inheritors. As long as the inheritance is settled like normal, you won’t have to set any money aside for this. Usually, it should factor into how the estate is settled.”

5. Is inheritance money taxable?

“The simple answer would be no,” answers Steve McCready. “In Canada, money you inherit isn’t taxable. It’s assumed that the tax on an inheritance has already been paid for before the executor settles the estate, meaning before you receive your inheritance. However, what you plan on doing with this money could be taxable. It’s a bit like lottery wins.”

“Three scenarios come to mind that could lead to major tax consequences, but there could be others: putting it towards non-registered investments, buying income property, and starting a business. Usually, these are worthwhile goals to consider if you inherit a significant amount of money. But be careful, and take the time to set up some optimization strategies before you proceed. Also, keep in mind that whether you’re single or in a relationship, whether you’re investing jointly or individually, and whether you’re acting as a natural or a legal person are all factors that may impact your tax rate. Of course, your financial planning advisor is your biggest ally if you’re trying to understand the impact tax will have on your goals.”

6. How can you use it to help your family?

“Any inheritance you receive is yours and yours alone. We don’t recommend paying off a joint debt using this money,” the expert insists. “Paying off a joint debt amounts to giving part of your inheritance to your partner. If you’re married and use it to contribute to your family estate (by buying a house, for example), you’ll be able to recover your share if you end up divorcing. So make sure that your inheritance money is deposited into a separate personal account. However, the case is much different for common-law couples in Quebec. They aren’t protected by family patrimony law. If they use their inheritance to pay for a joint mortgage, they cannot recover that portion of the money if they break up. One way to resolve this is to sign a cohabitation agreement with a clause that acknowledges one party’s contribution using their inheritance.”

“Nothing’s stopping you from using it for the younger generations in your family, however. To do so, open a registered education savings plan (RESP) to make your money grow for your children’s or grandchildren’s education. It will help you save in a tax-sheltered plan. Otherwise, have you considered signing up for life insurance for your children or grandchildren if they’re minors? This is a rather affordable product that increases in value quickly. Once they reach the age of majority, your children will become the holders of the plan.

7. If you inherit property, should you sell it?

“Sometimes people inherit property, like the deceased person’s primary residence or their cottage,” Steve Mc Cready points out. “If that’s the case, it’s up to you. If you decide to keep the property in your name, keep in mind that you’ll have to take care of the maintenance, renovations and other major responsibilities. But it can also be very profitable, as is the case for income property. If you’re not interested in managing or occupying the property, you could simply sell it. It would be a good idea to reinvest the money you make from that. Remember, your advisor is here to help you evaluate the different scenarios and make an informed decision.”

8. Should you update your will?

“Whether you’ve received an inheritance or not, you should update your will anytime your financial or family situation changes,” Steve Mc Cready explains. “Regardless of your financial situation, the benefit of having a will is that you avoid potential conflicts by putting your affairs in order. Whether for peace of mind or to make life easier for your loved ones, feel free to talk this over with an estate planning or tax professional, notary or lawyer.”

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