A massive intergenerational wealth transfer is on the horizon. In 91ԭ alone, roughlyfrom boomers to their millennial and gen-Z children before 2026 — and financial experts are sounding the alarm.
Why? Because some Canadians — especially younger generations whose finances have been hard hit by economic uncertainty over the past few years — might be depending on these funds to support their own golden years.
A survey conducted on behalf of Sun Life found that more than half (57 per cent) of millennials who expect to receive an inheritance say they plan to add it to their retirement savings or invest it.
But there are risks to shaping your future finances around an expected windfall, especially if you’re counting on aninheritanceto fund your retirement or dreams of home ownership.
Last-minute surprises
More than half of Canadians— 54 per cent —plan to pass on aninheritance, according to research from Edward Jones 91ԭ, which caninclude cash or other assets, such as registered accounts, investments and real estate. The amount can vary widely based on factors like whether the givers — generally, parents — need to dip into the funds to cover their own retirement or long-term-care needs.As a result, the amount you may receive can end up being a “huge mystery,” says Brenda Hiscock, certified financial planner at Objective Financial Partners.
Avoiding last-minute surprises is one of the reasons Hiscock recommends givers have an open discussion about a potentialinheritancewith the recipients, who are often their adult children.
Hiscock points out that talking about money is still taboo in many families (according to a recent report from Skyline Wealth Management, 58 per cent of respondents who intend to leave money had not discussed their estate with their heirs), and so conversations around inheritances usually end up happening much later than they should if at all, and so potential heirs could find themselves blindsided.
“You need to start discussing future plans when your kids are still young adults,” advises Hiscock, while acknowledging that starting this conversation can be difficult.
“It’s easier if the parents initiate the conversation, but givers often don’t because no one wants to talk about their own demise,” says Hiscock. “If people are waiting on money to come in, their future financial plan is reliant upon a death, right?”
Hiscock says the most natural time to start this conversation is when you’re assembling your will, and advises having children attend any meetings you may have with your financial adviser. During these conversations, she emphasizes the importance of focusing on the person who is giving the money away: What are their wishes? What are their intentions for the future gift?
She adds that these conversations should include assembling the parents’ personal information, such as passwords and usernames, in a place that is easily accessible to everybody in the family.
There is no inheritance tax in 91ԭ because all taxes owed by the deceased are paid out from the estate’s assets before the funds are transferred to beneficiaries. However, any growth on the money thereafter could be taxable.
It can take years to get the money
“When I’m dealing with clients who are coming to me who expect a futureinheritance, I ask them, ‘Are you sure you’re going to be getting something?’ ” says Hiscock. “We should only include it (in planning) if it’s a certainty, lowball it to the lowest you would possibly get, and have it coming in at such a late date that you would certainly have it by then.”
Julie Petrera, senior strategist for client needs at Edward Jones 91ԭ, points out that tapping into an inheritance can take some time and warns againstexpecting the funds by a certain date.
“If the assets are illiquid, it could take a long time for the beneficiaries to receive any proceeds, so the timing of the inheritance can be surprising to some,” she said. An example of an illiquid asset is a home that a parent leaves to, say, two siblings, a scenario in which a potential delay could ensue if the siblings are in conflict over what to do with the property or if the well itself is challenged or held up. “On the other hand, cash could be paid to a beneficiary within 30 days if left through an insurance policy.”
Health-care costs can eliminate an estate
There is always the possibility that any money you expect to inherit today could be depleted tomorrow. As the average life expectancy across 91ԭ rises, gift-givers might wind up needing the funds they had hoped to pass on to you to support their own health-care needs as they age. Expenses for long-term accommodations can range betweenin Ontario, with additional charges for optional services like hairdressing, transportation and internet.
“Some care costs can last a long time and can be very high because that person needs hands-on care,” says Hiscock. “Alzheimer’s is a big instance of where care costs can eliminate an estate.”
There’s also the chance that whoever is in charge of theinheritancedecides to change their mind and remove heirs from a will without their knowledge.
“I’ve seen some big surprises when someone’s been removed from a will, so I think that the real message is to not rely oninheritancefunds if at all possible for your retirement plan and try to look at that as sort of gravy to a plan,” says Hiscock.
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