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Your first step to navigating inheritanceMother hugging child, recipient of inheritance

Let’s discuss the inheritance you might have just received or that you are anticipating receiving, and what you should do with it.

It’s likely a very stressful time after someone close to you has passed away. Having a clear and informed mindset is important when dealing with the responsibilities of an inheritance.

Perhaps you have never had this huge amount of wealth, or it could have even doubled or tripled your net worth. There are many different aspects you need to factor in when deciding how to move forward.

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First, I would suggest you surround yourself with people you trust with your accounting, legal, and investment needs.

When someone inherits a large sum of money, they usually come across people that try to take advantage of their situation and there are many different schemes out there that could take advantage of an individual’s new-found wealth. Having a team of professionals, you trust is crucial to navigating an inheritance. For example, when a client comes to us asking for options regarding their inheritance, we consider and analyze every possible situation and solution in their best interest.

Should the inheritance be invested jointly with your spouse or used to pay off joint debt?

When you use the funds to pay off joint debt or to invest it jointly, these funds form part of your marriage assets and could account for your family property in the event of a marriage breakdown. Perhaps it’s a second marriage scenario and you want to ensure those funds remain in the bloodline.

These are some of the various concepts that need to be carefully considered.

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How can we avoid inheritance tax in Canada? Do you pay taxes on inheritance?

The simple answer to these questions is Canada does not have an estate tax or inheritance tax, unlike our neighbors to the south.

In regards to the actual investment, we would suggest creating a strategy that factors in your entire financial picture including your debt, your overall net worth, goals and your cash flows. We’d put it all together in a customized solution.

Often the first place clients look is their debt load. Do you have a lot of debt? Are you drowning in a situation where you’re uncomfortable with the amount of debt you have to pay?

Start with the highest interest costs debt, which is likely your credit card debt or look at an effective refinancing option.

If your debt is manageable and you have very little of it, then you don’t need to clear up that debt. You would then look at the best alternative options.

Now that you have added a large amount of funds to your net worth, we now want that money to grow for you. We want to help structure a portfolio for you that could create a cashflow at retirement or perhaps create long term growth for your future beneficiaries.

When you work with a portfolio manager, you will receive a comprehensively diversified portfolio that will work to achieve your goals and objectives, while considering the current market cycle for timing the purchases in your portfolio.

How to invest my inheritance?

How to invest your inheritance

As most inheritances are received in one chunk, the last thing you want to do is buy all your assets on the same day.

It’s just not prudent to buy all the different stocks, bonds, and other investments all on the same day. This can create a ton of market timing risk.

If the market falls dramatically after you buy your investments, your net worth now could significantly drop, however in the long term, it will likely be okay only if you’re able to stomach the market volatility and not make knee jerk reactions in the market.

If you’re new to investing or have never experienced market volatility, it’s going to be difficult. What I would suggest is a market staggering period (dollar cost averaging) where you’re buying as the market drops or moves to add to your selected asset allocation.

How long does it take to get inheritance money?

Most of the time when receiving an inheritance, if the funds are filtered through the Will, you will receive the proceeds after the estate has paid any applicable taxes and probate charges.

How long does it usually take to get that inheritance money?

It depends on how complex the estate is. Is the Will up to date and current? Will there be any disputes in the estate?

Before receiving your inheritance, there’s quite a few steps that need to take place.

Steps the personal rep or trustee needs to make before the trust can be terminated or before the estate can be closed:

  • Gathering an inventory checklist of the decedent’s documents and assets.
  • Personal Rep gets appointed by probate court or Trustee accepts appointment.
  • Value the decedent’s assets
  • The final bills and admin expenses need to be paid by the decedent
  • File applicable tax returns and pay applicable taxes
  • Distribute the rest of the assets to the beneficiaries

I have seen this take anywhere from a few months to a few years, depending on the estate.

Now that you have experienced a change in wealth, it’s the right time to review your insurance picture. Most importantly, how insurance and taxation now impact your estate planning goals.

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Now that you have inherited a significant sum, there could be additional tax consequences on your passing that would affect the after-tax amount received by your beneficiaries in the future. With this new inheritance, your insurance needs have potentially changed from debt coverage/survivor needs to estate tax planning.

After everything is considered, how can we structure a portfolio for your inheritance?

First, we want to look at REITS (Real Estate Investment Trusts) and likely tax efficient dividend paying investments for income generation. This could include “blue chip” Canadian equities that pay a dividend or other preferred shares.

We want to review your taxable situation and maximize your overall tax efficiency based on your tax brackets. We would focus on maximizing your TFSAs and depending on other factors, we may elect for additional RRSP contributions.

We would focus on holding the most tax favorable investments in your non-registered account and your least tax favorable in your RRSP/TFSAs.

Investing your inheritance has many moving parts. It’s best to seek professional help when you are ready to put those funds to work and grow your legacy.

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