Anthony Tobias
For Business Edge
Many of us associate money with meanings that have nothing to do with currency and everything to do with emotion.
And the emotional associations that go along with inherited money — because they’re conflicting and legitimate — are perhaps the strongest of all.
If a loved one has left a bequest, recipients naturally feel grief and, very often, guilt. But there’s hope and elation, too, if the inheritance will ease a financial burden — maybe allowing your kids to attend university without having to earn their way through, maybe letting you pay off the mortgage.
It’s important to acknowledge your feelings towards money you’ve inherited or may inherit. Dealing with them will help you through the loss. It will help you get going on a plan to take advantage of the gift you’ve received.
The mere expectation of receiving a bequest is no substitute for having a financial plan mapped out that doesn’t include the bequest. Everyone should have a financial plan, and having one in place will help you if you do receive an inheritance.
The best advice that I can give anyone who receives an inheritance is to do nothing right away. That includes letting anyone beyond your immediate family, if you have one, in on your good fortune.
You’d be surprised at the number of people and money-making schemes that come out of the woodwork when news of money gets out. It’s important to use at least a month after receiving an inheritance as a cooling-off period. This is when you’ll recognize that you’re in the enviable position of deciding how you’re going to use this money to make your life easier, better.
There are a lot of important factors to consider, and a financial advisor can help you make the most of your inheritance, along with taking care of pitfalls, like taxes. This is a time when you are pulled in many directions and where independent financial advice can provide some objectivity, as well as help in accomplishing your goals.
There are a number of steps you can take to minimize taxes prior to the bequest. RSP’s are generally passed to the surviving spouse, who is usually the beneficiary, on a tax-deferred basis. For any other beneficiary, the RSP amount would be fully taxed. Some people, to reduce taxes, take out an insurance policy on the life of the RSP holder, whereby, the proceeds from that policy, on the death of the policyholder, can be used to pay the taxes due when the RSP money passes to the next generation.
To avoid probate fees, some parents, while living, transfer part of their major assets — either property or monetary investments — to their children through joint ownership.
If you haven’t made your maximum RSP contribution in the year of your inheritance, you could do so with a chunk of that inheritance. Or you could make retroactive RSP contributions for prior years in which you didn’t make your maximum contribution.
Any contribution will reduce your taxable income, possibly placing you in a lower tax bracket. Once you have taken care of your short-term needs, you can focus on the long term and that’s where investing comes in.
Now, we’ve all heard the stories about beneficiaries who in a few short years, through mismanagement, immaturity, or lack of understanding, burn up a legacy with nothing to show for it.
There’s also the other side of the coin: People whose nervousness, embarrassment, whatever, causes them to be too cautious with the bequest. They tuck the money away into bank savings accounts, GICs, and T-Bills, and they leave it there.
There’s a happy medium here, one that can potentially provide income for spending and investment growth.
You owe it to yourself to make your inheritance or any invested savings work to achieve the highest possible return your risk tolerance will allow. If you can invest your money within your risk comfort zone — your risk tolerance — and make even a one-per cent-increase in your return, your savings will improve dramatically.
Here’s an example: A $100,000 investment growing at a seven-per-cent average compounding rate of return, will amount to almost $276,000 in 15 years. The same investment at 10 per cent growth will give you a total of about $416,000. So that extra per cent or two may make a big difference in your business, in your retirement, in your enjoyment of life.
Managing your inheritance wisely is the best tribute you can pay to your benefactor. It’s the best way of saying “thanks.”
(Anthony Tobias is branch manager with Great Western Financial Corporation in Calgary. These ideas are those of Anthony Tobias and do not necessarily reflect those ideas of Great Western Financial Corporation. Mutual funds are not guaranteed, their values will change and past performance may not be repeated. Read the prospectus before investing.)
