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Inheritance strategies

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Whether you pay off debt or invest, some strategic planning can help newly inherited money go a long way.

When a loved one passes away and leaves a bequest to you, you may be filled with a range of emotions from grief to relief – while you are saddened by your loss, an inheritance can be an excellent opportunity to improve your financial well-being.

An inheritance is a gift that needs to be treated with special care. If you find yourself the recipient of one, here are some ideas to consider.

Take your time

It’s a good idea not to make any major decisions about your inheritance too quickly. Carefully think about your options and how they might relate to your financial goals. Consider placing the assets in a high interest savings account until you are ready to make decisions.

Pay off consumer debt

Consumer debt (which includes credit cards, loans and lines of credit) often comes with a higher interest rate than a mortgage, so that’s a good place to start. Canadians were carrying an average of $23,496 in non-mortgage debt in early 2019.[1]

Identify your highest-interest debt and consider applying a substantial amount of your extra money towards that balance. Paying off a $3,000 credit card balance charging 19.99 per cent interest, for example, can save you nearly $560 in the first year. By contrast, if you continued making only minimum payments, it would take more than 17 years to pay off the balance and cost close to $3,500 in interest.[2]

Pay down your mortgage

The biggest debt for many is often a mortgage. Across Canada, the average mortgage balance is about $210,000.[3] If your mortgage allows lump-sum prepayments, consider allocating the extra funds towards the principal. You could save hundreds or even thousands in interest and be a step closer to paying off your mortgage.

Boost your retirement savings

Money can grow quickly inside a Registered Retirement Savings Plan (RRSP), because you don’t have to pay any tax on investment growth until you make withdrawals. 

Assuming you have contribution room available, $5,000 invested in an RRSP today, earning an average rate of return of six per cent and compounded annually, will grow to almost $29,000 in 30 years. That’s a tidy sum to put towards your retirement lifestyle. Don’t forget you also get a tax deduction based on your RRSP contribution, which may mean a refund the next time you file your taxes.

Save for a short-term goal

Many of us have a mix of short-term goals. You may be saving for a down payment on a home, a new car or a dream vacation. Or you may want to build up an emergency fund. 

Consider stashing extra cash in a Tax-Free Savings Account (TFSA) for these types of goals. Any investment growth accumulates tax-free, and the money can also be withdrawn tax-free. One of the best features of a TFSA is that you can take out money to finance a short-term goal and then recontribute the same amount in the following calendar year. In other words, you don’t lose your contribution room when you withdraw.

Save for education

If you’re saving for a child’s post-secondary education, you can get a head start by investing in a Registered Education Savings Plan (RESP). An RESP offers an incentive to save for a child’s education in the form of Canada Education Savings Grants (CESGs) for eligible beneficiaries and contributions. CESGs match 20 per cent of up to $2,500 in contributions each year, up to a maximum lifetime limit of $7,200. 

If you didn’t contribute last year, and you contribute $5,000 this year, you could receive $1,000 in CESGs. Over 10 years, earning an average rate of return of five per cent and compounded annually, that $6,000 could grow to over $9,700.

Make sure your own estate plan is up to date

Just as important as creating an estate plan is periodically reviewing and updating it, especially after you experience significant changes such as receiving a large inheritance.  Keep in mind that upon your death, the residual beneficiary of your will could be the sole beneficiary of your increased wealth – and this may not be your intention. 

By considering these tips and working closely with an advisor to put a plan in place, you can ensure that your inheritance is used effectively – just as your benefactor would want it to be.

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. 

[1] www.consumer.equifax.ca/about-equifax/press-releases/-/blogs/canadian-consumers-piled-on-their-winter-cred-2

[2] For illustration purposes only. Assumes minimum payments are made (the greater of $10 or three per cent of the balance monthly).

[3] www.cmhc-schl.gc.ca/en/data-and-research/publications-and-reports/mortgage-and-consumer-credit-trends


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