An inheritance strategy is usually not one of the financial strategies that many people have in place. Discussing estate planning amongst family members can be uncomfortable even with the best relationships, let alone discussing the contents of an estate strategy and what you may be inheriting after your loved one is gone.
But having a plan in place can save you headaches down the line. Losing a loved one is difficult emotionally and logistically, but having an inheritance strategy in place can make your life easier.
Inheritance With A Will
Having a will in place helps designate beneficiaries and determines who receives what. Wills can help avoid probate court's costly and time-consuming nature, although it may not prevent it entirely. Of course, a will doesn't prevent anyone from contesting it, but it does tend to make things easier. Knowing if you are one of the designated beneficiaries—and having an idea of what that inheritance looks like—can help you plan for what happens when you inherit cash or other assets.1
When No Will Exists
Not having a will can make receiving an inheritance painful. Sorting out an estate can result in steep legal fees, dealing with probate, and potentially fighting with family and friends. If you're not sure exactly what the estate entails, it could take months or years to track everything down. Then there's the personal cost. Even if everyone agrees on how the estate should be settled, the process often takes a financial, mental, and emotional toll.2
If there are assets other than cash to divide up, sorting through an estate without a will becomes exponentially more complicated. Life insurance, real estate, and assets other than cash may be subject to different inheritance rules. Spouses often receive additional tax breaks and incentives for an inheritance, and many adult children and other relatives don't have that luxury.2,3
Creating an inheritance strategy also allows you to help make sure your loved one's estate is in order. You don't want to wait until after your loved one is gone to discover, for example, that an ex-spouse is still listed as a beneficiary on a life insurance policy.
The Pitfalls of Inheritance
While many of us dream of a lump sum of cash falling into our laps, the reality of inheritance can be a little less rosy. Be aware of the differences in how the CRA taxes in the hands of the beneficiary versus the estate. Inheriting real estate means the property requires maintenance and upkeep as long as you hold onto it. And while it used to be easy to shelter some assets, this option involves planning.
Don't Quit Your Dayjob
Just because you've received a large inheritance doesn't mean it's time to quit your day job and retire to luxurious living on a tropical island. According to the National Endowment for Financial Education, an estimated 70% of people who receive a large inheritance spend it within a few years.2 Having a plan can make it easier to stay on track before the temptation to spend hits your bank account.
Even in the best circumstances, dealing with an inheritance can be complicated. Remember, even if you're not expecting a large amount of money or property from an estate, it still behooves you to have a strategy in place. It's important not to make any significant decisions or to suddenly change your spending habits just because more assets are now available to you. Working with a skilled financial advisor knowledgeable about the ins and outs of inheritance can help make sure your inheritance is working for you, not against you.
Please consult financial, legal, or tax professionals for information specific to your situation. The information and material presented are general, may have changed since the published date shown, and should not be considered financial advice. LetsPlan.ca is published in Canada exclusively for residents of Canadian jurisdictions where our products and services may be legally offered. The services offered within this site are available exclusively through our Canadian advisors. While we often provide original content, Twenty Over Ten initially provided the subject matter for this post. It has since been edited, reviewed and approved by our Privacy and Compliance Officer. Advisors may only conduct business with residents of the province(s) in which they are licensed and registered.