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Thursday, November 9, 2017

Straight Talk on Inheritances

Money is always a touchy subject. It gets even more touchy when the topic of death and money comes up. Baby Boomers have put their work ethic into overdrive their whole lives and many of them will be retiring with a sizable nest egg. For some, it means that they will be living a good amount of money to the next generation. While leaving money for your children is about as selfless as it gets, it does come with some complications. There are tax implications, lifestyle concerns and of course the wishes of the deceased. Learning the ins and outs of wealth transfer is important as within the next decade over 750 Billion in wealth will be passed on to the Baby Boomers. It is being called the “Largest intergenerational wealth transfer in Canadian history,” and it has the power to shift economic trends in our country. In this post, I will discuss 2 key inheritance topics: Leaving one and receiving one. I will give tips on doing both so that you can pass on your wealth in the most effective way possible.

Leaving an Inheritance

1) Financial Literacy

We have all heard about the lottery winner being broke within a year or the star athlete being broke a few years after retirement. It is no joke that even large amount of money can be gone quickly. It is imperative that while you are living you teach your children financial literacy. If you are older and must learn on your own or seek out professional help from a trusted advisor. Large amounts of money overnight can complicate your finances and a great amount of leakage can occur. It is almost like a circle of vultures will begin to form to suck you dry. Have a plan for the money before you give it and discuss it with the person you will be giving it to. Set up a will and a living will so that these wishes can be fulfilled. Also, make sure you set up a trusted person as the trustee for your estate, so they can execute on your wishes.

5 Tips Before You Leave an Inheritance – Forbes

2) Consider setting up a trust

One large fear of many people is that they will leave a large sum of money to a loved one and that person will lose all their ambition and drive. For some, their passions run as deep as the money they are paid and with a lot of money, the hard work ceases. Setting up a trust can eliminate that fear. With the help of a will and a trusted trustee, you can have a trust set up and money to be given at intervals during the lifetime of the recipient. Giving a large amount of money to a 20-year-old might be damaging. I know I would have blown it quickly and have nothing to show for it. You can have the money come out after graduation, marriage and then the bulk of it coming at the ages of 40 and 50. That would make the recipient less inclined to blow it all on junk. You must remember that a trust is only good if there is a known trustee in place that you can count on to carry out your wishes.

How to set up a trust in Canada – Investopedia

3) Think about taxes

You must keep in mind that although money transfers to your spouse tax-free, for your children it is a different story. When your children receive this money, it will be subject to estate taxes, probate and lawyer fees. It gets even messier when there is property involved such as leaving your children the family farm or cottage. Will they have the money to cover the tax bill? Will the money you leave them only be able to do that, or will they have a plan in place to handle that situation? Consider life insurance as a solution to estate taxes. Have the insurance company foot the bill instead of your children. The tax man doesn’t leave you alone just because you died, make sure you are ready for that.

Canadian Inheritance Tax Laws and Information – Turbo tax

Estate Planning

Receiving an Inheritance

1) Act like it never happened

There is a real urge to buy all the things that you’ve always wanted because you just received a large amount of money. I would implore you to not do that. The reason is simple: I don’t think it is what the person who gave it to you wanted to be done. One thing that people with money realize that people without don’t, is that having money allows you to make more money. You might say, “Who doesn’t know that!” If people knew that they wouldn’t blow inheritances. Receiving income on a 1-Million-dollar inheritance could mean a 60-80K annual salary. That only can occur if you don’t initially blow the million dollars. When you have money, you have options. When you have objects you only have 2 options: Use them or sell them. When you sell your objects you never get what they are fully worth. Make sure you don’t go on a stupid shopping spree and don’t quit your job the next day.

What to do with an Inheritance – Canadian Living

2) Evaluate your financial situation

Do you have debt? Are you meeting your monthly needs currently? Have you saved anything for retirement? When receiving an inheritance, it is a great time to evaluate your financial situation. Eliminating things in your life that are costing you and creating a stream of growth is key. That can only be done by fully understanding your current situation. Seek the help of an expert to know where you stand. For most paying off debt will be a must. Others can look to paying off the mortgage. Most would like a nest egg for themselves in the future. Go over priorities and obligations and find out what matters most and what can wait. You must remember that this money is only a blessing if it is utilized correctly.

5 tax Advantaged Places to Park Your Money – Budget Boss

3) Be generous

Without giving all the inheritance away, make sure you do not squander this opportunity to be giving. Your loved ones were generous enough to think of you when they decided to include you in this wealth. You should think of someone you can help as well. There are plenty of local organizations that would be very happy receive any donation, so look to them. Also, inheritances can sometimes turn a family against each other. Make sure that if someone was left out that you include them. The person who left the money may have overlooked someone and if that person was you, it would be devastating. The passing of a loved one should bring a family together, not tear it apart. Make sure that the love continues when money becomes involved.

There are sometimes complex issues when giving and receiving an inheritance. I cannot stress enough to seek the help of an expert when dealing with this situation. Lawyers, Advisors and Tax Specialists can help you navigate through the muddy waters. Using their help can mean more money saved in the long run. It is the best way to make sure the wishes of the one lost are fulfilled.

Thanks for reading our post today on inheritances as Baby Boomer Week continues at Budget Boss. Join us tomorrow as we wrap up the week with our outlook for Boomers. If you have questions regarding giving or getting an inheritance, please feel free to contact me at joe@budgetboss.ca. Have a great day friends!

“Estate planning is an important and everlasting gift you can give your family. Setting up a smooth inheritance isn’t as hard as you might think.” – Suze Orman
Estate Planning

Registered Retirement Savings Plans: What you need to know

Email – joe@budgetboss.ca 

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