Jason Evans received an inheritance from his mother in a trust when he was 18 and his sister was 16. The trust covered their living expenses until they each turned 21, when they received a portion to manage on their own, and the rest at age 25.
In addition to grieving her loss, coming just a few years after his father had passed away, Mr. Evans said he felt a significant amount of responsibility. “It was definitely overwhelming, given [my] age,” he said. Mr. Evans, who is now a certified financial planner in Winnipeg, said he invested the money for postsecondary education expenses, and to save for his retirement.
While an inheritance often comes with a torrent of emotions, it can also be a financial game-changer, allowing people to consider financial goals that had previously been out of reach. But at the same time, receiving a sizable windfall is an intimidating prospect leaving many Canadians wondering how to handle it.
“If you’ve lived a life with little money and a lot of scarcity and all of a sudden you inherited a lot, it’s weird. It can really shake you up,” said Brenda St. Louis, a financial counsellor and certified money coach in Vancouver.
More than half of Gen Z and millennial Canadians said they’ll need an inheritance to reach their financial goals, including just staying afloat, buying a house or having a child, according to a September, 2022, survey by Pollara for investment advisers Edward Jones.
For Mr. Evans, 35, a second inheritance – an unexpected $32,000 from his great-aunt when he was 31 – helped him buy his first home. “It opened up an opportunity I didn’t previously have,” he said.
While inheritances have traditionally come to people later in their lives, early inheritances have become increasingly common, particularly to help adult children buy their first homes. An October, 2021, report from CIBC Capital Markets found family gifting accounted for 10 per cent of total down payments over the previous year, and 30 per cent of first-time buyers received a gift from a family member.
Financial planners advise the first step to take after receiving an inheritance is set it aside for a cooling-off period.
“It’s a very emotionally charged time, you’ve lost a loved one, and people tend to be more prone to making behavioural mistakes in those times,” said Mark McGrath, a certified financial planner (CFP) with PWL Capital Inc. in Squamish, B.C.
Mr. McGrath said a cashable guaranteed investment certificate can be a good option, given their short lock-in periods of one to three months before the funds can be accessed.
Alexandra Boland, a CFP at Caring for Clients in Toronto, said a high-interest savings account is the best place to park the funds in the short term.
Depending on the size of the inheritance, Ms. Boland said beneficiaries may want to be mindful of Canadian Deposit Insurance Corp. limits if they are depositing funds at a bank or other savings institution. The CDIC insures eligible deposits up to a maximum of $100,000 per account. Ms. Boland said people will have to weigh the benefits of multiple accounts against the inconvenience of dealing with multiple financial institutions and possible account fees.
Beneficiaries with spouses or partners should initially hold on to the inheritance in a non-registered account in their own name, the experts said. An inheritance is the property of the person who receives it if it is kept in their name only, and wouldn’t be split in the event of a relationship breakdown. But that changes if the beneficiary used part or all of their inheritance to pay down the mortgage of a jointly-owned property or a shared line of credit.
“It’s hard to unmingle that money, and it’s subjected to the division of assets,” Mr. McGrath said.
He also noted people commonly misunderstand how much a lump sum inheritance can do for them. “I’ve seen people in their 20s inheriting a million dollars and spending down two-thirds in the first five years because they think it’s infinite,” he said.
If the beneficiary has any high-interest debt, such as on a credit card or an unsecured line of credit, that should be the first place to allocate the money, the advisers said.
But the question of whether to pay down a mortgage is more nuanced. For people who are shouldering mortgages with high interest rates, making additional payments makes a lot of sense, Mr. McGrath said.
After any debt is dealt with, he suggested setting aside part of the money for short-term goals – such as travel plans, replacing a car, or other anticipated expenses in the next few years – in lower-risk investments like a high-interest savings account or a GIC. Any funds allocated to longer-term goals like saving for retirement can be invested more aggressively, depending on the person’s age, risk tolerance and tax bracket.
A beneficiary’s age when they receive an inheritance can have an impact on how they should think about it, Mr. McGrath said. Someone receiving a windfall earlier in their life is likely to have many of their best earning years ahead of them, meaning it could a good time to sock the funds away in investments and benefit from years of compound growth, he said. Older Canadians are more likely to be established in their career and already have accomplished many of their financial goals, and could use the funds for experiences and philanthropy.
Young Canadians may want to put all their inheritance toward the purchase of their first home. The country’s ultra-hot housing market has created a “scarcity mindset” that makes many people feel they need to own, Ms. St. Louis said, “but that’s not always the most fiscally responsible thing.”
Someone who puts the entirety of an inheritance toward a down payment, and buys as much house as they can afford, could end up house-poor with crippling mortgage payments. “If you get an inheritance, a portion of it can go to buying a home but you really want to do the math and you really want to create money for your retirement,” she said.
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