March 14th, 2024

What changes when you inherit money?

With billions of dollars set to transition from Baby Boomers to their children and grandchildren in the coming years, many younger Canadians will grapple with the impact of an inheritance. While the impact will be mostly positive – more money that they can put towards goals such as home ownership and retirement – there is also a degree of pressure to avoid costly mistakes.

Here’s a look at some of the key changes that come with inheriting money, and how they can help you realize, protect and enhance your best life.

Realize your goals

The first fundamental wealth management step is realizing your goals. This requires you to define what you want out of life and set out intentionally to achieve it. When you inherit money, here are some of the areas of your wealth management plan that may need to be adjusted:

Revisit your goals. An inheritance can alter your goals for a number of reasons, including how it changes your personal perspective and how it changes your financial means. Before making any drastic changes to your investments, spend some time thinking about what you are truly aiming for.

Diversify your investments. An inheritance could allow you to consider new diversification strategies. For example, you might want to shift the proportion of your portfolio that it is geared towards ​creating regular income versus generating long-term growth. You might also wish to add alternative investment strategies or a new investment manager to the mix.

Update your risk profile. Your inheritance may have a material impact on the amount of risk that you need or are willing to take. For example, y​ou may be in a position to reduce risk if you no longer require as much growth to reach your goals. Alternatively, you may have new goals that push your time horizon out to future generations, and you may be willing to increase risk in service of achieving greater long-term returns.​

Review your investment taxation. A final consideration is reviewing if your inheritance changes the taxation of your investments. Most of your current investment assets may be in registered accounts such as RRSPs or TFSAs that avoid annual taxation. Your inheritance may require you to invest outside of these tax-preferred accounts, leading to new forms of taxable income to manage.

Protect your assets

The second fundamental step of wealth management is protecting what you have built. This requires you to put guardrails in place to manage the risks that can impact your financial assets. Here are some key considerations:

Review your will and estate plan. If you have not created or updated your estate plan, make this a priority. Without one, the administration of your estate will be in the hands of the government, causing delays, costs, possible challenges, and the potential to sow the seeds of family dysfunction.​ Make sure your will, powers of attorney, account beneficiaries, and choice of executor are accurate, up-to-date, and consistent with your wishes.

Assess your tax situation. Your inheritance will no doubt be a positive for your financial position, but it will very likely increase the amount you send to the tax man each year. Potential tax implications to consider are​ being pushed into a higher tax bracket, possibly impacting your ability to collect Old Age Security. Potential workarounds include sheltering some of your inheritance via RRSP or TFSA contributions, considering charitable giving opportunities, and exploring legal structures such as family trusts.

Update your insurance coverage. Insurance allows you to transfer the financial risk of dying early, being diagnosed with a serious illness, or becoming disabled and losing the ability to earn an income. An inheritance can increase your financial resources and make you less vulnerable to these risks. When that happens, you may want to reassess the suitability of your current coverage or consider new insurance strategies.

Enhance your life

Once you have checked all the critical boxes like paying down debt, investing wisely, and protecting what you have built, it’s time to think about strategies that can create a richer life for you, your loved ones and your community. ​Here are some ideas:

Update your spending. A rather fun way an inheritance can enhance your life is by allowing you to spend more! This could mean more dinners out and more travel. It could mean achieving your bucket list, taking up a new hobby or educational pursuit, or spending more on your interests and passions. A word of caution though: make sure to stress test any new spending to make sure your primary objectives are not being sacrificed. ​

Define your philanthropic approach. You may wish to use your inheritance to support causes that are important to you or the individual from whom you received the inheritance. Philanthropic initiatives can take the form of individual or annual donations, and can be structured through the creation of a Donor Advised Fund or a foundation to create a lasting legacy of giving. ​

Support younger generations. You may wish to use your inheritance to help your children or other younger family members. There are lots of options to consider, including tax-advantaged investment strategies to fund a first home or post-secondary education, strategically supporting business ventures, and even insurance strategies that can be started when children are young.

Inheriting money can transform how you realize, protect, and enhance your financial life.​ It could wipe out debts​, transform how you invest​, reduce or eliminate your need for insurance​, expose you to more tax​, open up opportunities for your kids or grandkids​, and give you new choices around things like spending, charity, and how you live your life​.

At Cumberland Private Wealth, we help families navigate these changes and come out further ahead. Every situation is unique, so a good first step would be to sit down with one of our Portfolio Managers to discuss where you are in the process and where you want to be. We look forward to meeting you.