You Just Received an Inheritance

It’s that time again, financial folks! Time for another episode of The Heart of Your Money. This week I’m diving into a bit of an emotional topic – inheritance. They can be life-changing but also often come with a whole whack-load of emotions like grief and confusion about what to do next.

In this podcast, I’m going through the things that I want you to avoid if you come into an inheritance, as well as what to consider when figuring it all out.

The number one thing is to remember that this inheritance money is not going anywhere. Life should feel normal and stable before you get your planner out to start planning.

Show Notes:

Hello, and welcome to another round of, “Our Heart of Money Talks”. Today I want to talk about receiving an inheritance. What should you do if you’ve received some money from your parents or maybe a family member’s estate? The last few months, our office has been busy. We’ve been helping clients out with this, and it’s becoming more and more common probably because of the age of our parents.

Everything I talk about today is applicable for either a small inheritance or a large one that might feel like a bit of a windfall. I think of this money as a gift that comes with a lot of emotions. It can be full of grief and loss, and there needs to be time to heal. Before I jump into a few things today, the most important takeaway, the most important thing I can say is that you should not make any important life change decisions for at least three to four months.

The inheritance money is not going to go anywhere. It can be parked in a savings account until you’ve had time to think, and you’re ready to make some decisions. Life should feel a little bit more normal and stable before you start making a plan with your new money. The first thing is to park the money and get back to normal. Swim through the grief.

If you have to take a breather before you make any decisions, this is okay.

The second thing is when you’re ready, you’re going to want to update your financial plan and you’re going to want to work through some options with a professional. There are going to be some scenarios and some discussions before you make any life-changing decisions.

Then when you’re ready, those decisions should be made within the perimeters of that plan. You want to be strategic and plan with purpose. You might find that your priorities have changed.

Once you’ve received the money, you’ll want to explore that. Some of the conversations that come up all the time are around if you are going to want to pay down debt, what debt should you pay down and are you going to want to donate. That’s a huge one right now with one couple that we’re working with and I love it.

It actually grabs my heart that part of peoples’ strategies is they want to make sure that annually they make donations.

The other one is, are you going to put away for your future self and how do you best do that? It’s about making the most of this opportunity.

I like to think there are three things to money. I always have to remind myself because sometimes it’s easy to get sidetracked…but it’s something that we can start even teaching our children. It’s the three things… give, save, and spend. So one of the first things I’m going to jump into this, is that because it’s probably already going through your head is that one of the first things people think about is if they haven’t paid off the mortgage, they should.

Now, this may be a good move from a financial or legal perspective. But does it make better sense to pay off a 2% or 2.5%mortgage interest or to invest in a stock or mutual funds that can earn up to 6%? You need to strike a balance to make an informed decision as to whether you should pay off that mortgage right away versus investing in the market and earning returns.

When I talk about this, I’m saying, maybe it’s not the best decision to pay off the mortgage, but this is a personal decision that is not the same for everyone. It depends on the amount you receive, your age, your savings, where you are in life and what you already have.

There are so many variables that are unique to only you. Generally paying off debt is a great thing, like credit cards, line of credit or vehicle payments. So which investment bucket should you prioritize? You can invest your inheritance across a whole bunch of different buckets in different places. But that’s where it could be random if you haven’t actually done the strategic thinking.

So I usually suggest maxing out your tax-free savings account. First after that, it would be a good idea to look at your registered retirement savings. So your RSP to see how much room you have, how much have you already saved in RSPs and look at that and see if that’s the next place. If you have children or grandchildren, a registered education savings plan, which is an RESP is definitely something to look into.

The government will top-up, up to 20% grant each year to a max of $500, and $500 a year is still $500 a year. So finally if you’re already contributing to those and you’re filling those buckets, then there’s a non-registered bucket option. That’s that non-registered investment, and maybe even insurance might be something that you need to talk about, and maybe there’s a definite need in your family for that.

So those are some of the buckets that you need to look at. Definitely start with the tax-free savings account because of course, it has tax preference. So the next question and the next kind of nudge that I send people with is updating your will. Whether you’ve received an inheritance or not, you should be updating your wealth portfolio anytime your financial or family situation changes.

Not having that will is going to become a problem because not only have you now added to your finances, we’ll call it a windfall as an inheritance, but now you need to actually plan for the what-ifs for yourself by putting your affairs in order, whether that’s for peace of mind, or to make life easier for your loved ones.

Another question here I get asked all the time is, “Do I have to pay taxes on an inheritance?”

No, happily Canada does not have an inheritance tax. That is much different than in the US but here in Canada, if you receive an inheritance, it is tax-free. The estate has paid taxes on that, and all outstanding bills are expected to be paid by the estate, not you, the beneficiary. Whatever amount, the person that has passed away is owing and taxes should be settled in a tax return before you receive your inheritance, therefore leaving you with that, tax-free

Now one important thing to think about is that I know an inheritance comes with a whole bunch of emotions. It’s a gift from someone that has passed away, but there are some similarities when I use the term windfall. It is similar to that if someone has won the lottery now, of course, there’s a whole bunch of different emotions around that.

There isn’t grief and sadness and healing that has to happen, but the similarity is there. There is a US study that shows that one in three Americans burn through their inheritance within two years because of financial mismanagement. Soak that in. One in three Americans burned through their inheritance within two years.

That is huge. And that is the similarity with a lot of lottery winners, the exact same thing. So often a lack of financial literacy and not enough communication between the family members. It’s a problem. And so there has to be communication so this inheritance isn’t a surprise that all of a sudden out of the blue, you had absolutely no idea that you were even a beneficiary.

One of the things that’s great is that transparent communication it’s, it can be a healthy conversation, but letting someone know so that there isn’t some huge surprise of even being named a beneficiary.

There’s a psychology to unexpected windfalls and inheritance – a sense of found money that leads many people to spend it more easily than hard-earned income. Like I said, those lottery winners that are broke two years later, it’s the exact same idea. So this is why I’m talking to you today. You really do need to get some professional advice and you need to make a plan with purpose before you start making some of your decisions.

So a few things of what not to do, please don’t skip paying your personal taxes, even though this inheritance is tax-free. You still need to stay on top of your financial affairs. Don’t immediately pay off your house without exploring all the options.

Try to take your time on that and see the best fit for you. Another thing not to do is go to the casino and try to double your money. Now you might be chuckling and say as if, but it truly, because of that idea of found money sometimes that happens. There’s the quick investment, something that sounds like a great idea. You’ll think you will get your money back. It sounds too good to be true.

Be careful. Another thing is don’t think that you are an investment guru. We all need coaching. Even financial planners need a financial planner. Oh, and don’t fail to set a beneficiary or update your own estate plan.

After this windfall, make sure that you cover all bases with your newfound wealth. Don’t buy a timeshare, or go on a spending spree. And try not to talk about how much you inherited. Just like lottery winners, that could have strangers come out of the woodwork to try them for money, or it gets out there. This is your personal information and you don’t need the world to be adding you some extra stress.

So my biggest takeaway for you today right now, the number one thing is to just pause and then plan. That’s it. If you have any questions, send them my way to [email protected]. I’d love to help. Until next week, take care.