Managing a Windfall: How to Be a Good Steward of Your Inheritance

Receiving an inheritance comes with a mix of emotions. You may be grieving the loss of a loved one while feeling overwhelmed with managing a recent windfall. No matter the size of your inheritance, there are some things you can do right away to be a responsible and conscientious steward of wealth. From saving, paying down debt and investing, here are a few considerations regarding your recent inheritance.

Tip #1: Review Your Savings Goals

A simple strategy for those who may feel overwhelmed by an inheritance is to start by reviewing your savings goals. This could include retirement savings, emergency savings or a savings goal for something like a new car or house. It may be beneficial to allocate a majority or a portion of your inheritance towards your savings goals. While it may not feel especially exciting to tuck this money away, it can help create a nice cushion and make your big goals much more attainable.

Tip #2: Focus on Debt

Debt can grow exponentially while diminishing your wealth, meaning if you have any, it may be beneficial to focus on paying it down. From mortgages, student loans, and car loans to higher interest debts like personal and credit card debt, focus first on those with the highest interest. For low-interest debts like mortgage and student loans, consider making principal-only payments. These can help significantly reduce your interest payments in the long run by lowering interest costs.

Tip #3: Treat Yourself (Sparingly)

After coming into a financial windfall, one of the first things everyone wants to do is buy something they've always wanted. It is important to indulge yourself with a little something to enjoy the money. Just be sure to budget for it appropriately, and then don't exceed that budgeted amount. Consider something that gives value while doubling as an asset for your future, such as artwork, investment properties or jewelry - anything likely to hold or appreciate is a good choice. This can allow you to enjoy them today while planning for tomorrow.

Tip #4: Build Your Portfolio

If you don’t have one already, now may be an opportune time to build your portfolio. If you can, work with a financial advisor who can offer personalized investment strategies built to address your short-term concerns and long-term goals. Investing a portion of your inheritance means the potential is there to maintain and grow its purchasing power over time, although returns are never guaranteed.

Tip #5: Understand Potential Tax Obligations

There is no inheritance tax in Canada, and in most cases, the beneficiary of an inheritance will not be obligated to pay taxes owed on the estate. However, there are certain exemptions, including the Principal Residence Exemption and the Lifetime Capital Gains Exemption. It may still benefit beneficiaries to work with a financial advisor or tax professional to determine how decisions regarding the inheritance could affect future tax obligations.

An inheritance is an opportunity for beneficiaries like you to make impactful financial decisions. As you determine how best to manage your recent windfall, work with a financial advisor to build the right course of action for your financial wellbeing.