Estimates of expected Canadian inheritances over the next decade are as high as $1 trillion. Stock markets, real estate prices and other factors will significantly impact the actual number. Regardless, we are entering an age of unprecedented wealth transfer for parents and children, and there are complexities for those both leaving and receiving inheritances.
Some seniors feel they need to leave an inheritance. According to a 2019 survey by Merrill Lynch and Age Wave, 47 per cent of respondents aged 55 and older said leaving an inheritance was “the right thing to do” for their children. Fifty-five per cent of millennials, meanwhile said “it’s a parent’s obligation” to leave an inheritance. The generation that most of the millennials’ parents belong to — the baby boomers — partially agree; 36 per cent of boomers felt that an inheritance is a parent’s obligation.
Many people spend their working years scrimping and saving to be able to afford to retire. Inheritance pressure after retiring may limit spending in retirement. It insinuates that workers need to save for not only retirement, but also their apparent inheritance obligation to their children.
It is interesting to note the criticism of strategies such as reverse mortgages for seniors. A reverse mortgage involves borrowing against a senior’s home, generally by those who do not have cash or investments, to supplement spending in their elder years. Interest rates are higher than for conventional mortgages, but for those without other assets or the ability to qualify for traditional financing, a reverse mortgage may be the only alternative to selling a home.
I am not sure how borrowing against an asset that is hopefully appreciating over time is so different from selling that same asset, to downsize, rent, or move into a retirement home, and spending the net proceeds. Whether or not a reverse mortgage or staying in their home is best for a senior would depend on financial considerations as well as their health. But given a primary criticism of a reverse mortgage is the reduction of an estate’s value, this echoes the inheritance obligation narrative.
Receiving an inheritance can have its challenges. Some recipients see it as a windfall and spend it frivolously. Others see it as blood money and feel a great burden when they inherit. My best advice to someone receiving an inheritance is not to rush to make decisions. If the money sits in a bank account for six months, it will unlikely make or break you financially in the long run. It can take months or years to mourn a death.
My best advice to someone receiving an inheritance is not to rush to make decisions.
Some people would rather see their family enjoy an inheritance while they are still alive. Making gifts to children or grandchildren can be a great way to do so. There are no tax implications of a gift of cash to an adult child or grandchild. There may be attribution of subsequent investment income back to a grandparent’s tax return if a gift is made to a minor grandchild and the gift is then invested for them. Registered Education Savings Plan (RESP) contributions for grandchildren can be a good strategy to avoid attribution of investment income, benefit form government grants and tax deferred growth, and save for their post-secondary education. Trusts can also be established to hold money for grandchildren during your life or upon your death.
The key with giving money to family during your life is to ensure you are not passing along too much too early, so as not to risk your own financial security. Depending how a gift is made to a child or what they do with the gift, it could be exposed to family law issues like a division of property in the event they get divorced.
There are ways to maximize an estate. Income tax and probate fees can result in significant costs when someone dies. Early withdrawals or taking out more than the minimum withdrawals from registered accounts such as Registered Retirement Income Funds (RRIFs) can result in less lifetime tax for a retiree. Contributing to Tax Free Savings Accounts (TFSAs) can save tax annually and on death. Holding stocks in certain accounts and bonds in other accounts can also help increase after-tax returns and reduce tax payable. The choice of beneficiary designations, use of trusts, implementing an estate freeze, or insurance strategies can also reduce tax and probate costs.
A beloved cottage, family business, or even seemingly trivial heirlooms can lead to acrimony. Getting ahead of these disagreements to the extent you can is something to consider as part of your estate planning.
You do not have to leave all your money to your children, particularly if your estate is large. Your will can include specific bequests to friends, other family members, or charities for a set dollar amount or percentage of your estate, before the remaining residue is distributed to your kids. You can also bypass your children and leave some money to your grandchildren.
Beyond donations, those who are philanthropic can consider an endowment to a charity where the principal is kept intact, and the income is used to provide ongoing support, so can last in perpetuity. There are also donor-advised funds that can be established with smaller donations of as little as $5,000 that may allow ongoing input on donations from family members. Larger estates can consider establishing a private foundation.
Settling an estate can be a burden. People tend to underestimate the obligations of an executor until they have undertaken the role themselves. Money, taxes and legal filings can be intimidating for some people. It costs more to appoint a third party like a trust company or a professional executor to settle an estate. The benefits may outweigh the costs for either a parent writing their will, or a child tasked with managing a complicated or overwhelming estate during a time of grief.
Some of the seemingly minor estate planning decisions tend to be overlooked. No matter the size of an estate, a family needs to make decisions about a funeral, burial or cremation. Some of these difficult tasks that come after losing a loved one could be made easier by discussing things ahead of time, or by pre-planning a funeral, however morbid the idea might feel.
Inheritances are complicated all around. There may be obligations, perceived or otherwise, as well as decisions and strategies to consider. No matter what, death is an inevitable fact of life, and so are the resulting complexities of estate planning and inheritances.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.