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How to make the most of an inheritance

Investing inherited money can help you achieve financial goals, but it’s critical to have a strategic plan to preserve and grow your new-found wealth


Date: December 16, 2015

Inheriting a significant estate can be a bittersweet experience. That’s because, in most cases, the passage of wealth comes with the passing of a loved one.

“Most of the time when we work with people who receive an inheritance, it’s from somebody close to them. It’s emotional and people are grieving,” explains Jennifer Poon, director, advanced planning – wealth, at Sun Life Financial. “When it’s a large sum of money, most people feel a sense of responsibility and don’t want to squander it.”

Investing an inheritance wisely is the main goal for most beneficiaries, but with a multitude of investment opportunities available to Canadians, setting up a strategic plan can be one of the most complex – and critical – aspects of preserving and growing their new-found wealth.

As Ms. Poon explains, knowing how to invest an inheritance starts with an analysis of a beneficiary’s personal financial needs and circumstances.

In the case of older, financially-secure beneficiaries with retirement plans already in place, existing wealth might offer them the flexibility to invest their inheritance in a nest egg for family members, or even donate some of the money to their preferred charity.

Younger recipients might choose to save the money for their retirement, while also using some funds to pay down consumer debts or mortgages, top up tax-free savings accounts (TFSAs), maximize registered retirement savings plan (RRSP) contributions and, if they have children, invest in registered education savings plans (RESPs).

“If you have the opportunity to provide for yourself and the people you love, you need to rank the priority of how you want to take care of things,” Ms. Poon explains. “My view is you should help yourself first. That means paying off debts first, such as credit card bills.”

But even before making what could be life-altering decisions, it pays to get the right help, advises Cynthia Kett, a principal at Toronto-based Stewart and Kett Financial Advisors Inc.

“People need to ask themselves how involved they’re willing to be in the management of their portfolios,” she explains. “They’ll need to invest with help of some sort, whether it’s an investment advisor or a portfolio manager.”

Ms. Kett advises clients to wait up to a year before building an advisory team – which often consists of an accountant, financial advisor or portfolio manager, and in some cases, a tax lawyer – and making decisions. This waiting period offers time to cope with the emotions that come with losing a loved one and then managing a sizeable estate.

“It’s better to think for the long and not the short term,” she adds. “If the [inheritance] amount is significant relative to your usual circumstances, look to obtain objective advice. Many people will offer ways to help with your money, but some advice may not be objective.”

At that point, deciding exactly how to invest the money becomes a question of risk tolerance, Ms. Poon explains.

“Many people who inherit sizeable estates are 60 to 65 years old,” she notes. “Many people in this age group prefer to invest in something with a principal guarantee, like a segregated fund contract or a guaranteed investment certificate (GIC) because they feel a responsibility to preserve this money.” Or they may require a fixed-income stream for retirement.

As a general rule, Ms. Poon encourages clients in their 60s to embrace a 60/40 asset ratio of fixed-income investments (such as bonds or GICs) to equities. That ratio could be reversed if family members inherit portfolios in their 30s or 40s, when growth horizons are longer and risk tolerances are far greater.

Whatever the strategy, she points out that building a balanced portfolio with diversified investment and income streams is the best approach for maintaining and growing that capital.

One important component of the conversation around managing any new wealth includes a discussion of estate planning to determine how it should pass on to the next generation – no matter the recipient’s age.

That means drafting (or revising) a will and designating both a power of attorney and eventual beneficiaries, be they individuals or charitable organizations. Purchasing a life insurance policy with a death benefit can help cover the eventual tax bill successors will need to cover when they inherit whatever remains of the estate.

In addition, designating beneficiaries on registered accounts such as RRSPs or TFSAs allows that money to pass on without incurring probate fees in some Canadian provinces, says Ms. Poon.

“You also have to remember that with more than one family member [designated in your will], there could be conflict,” she says. “These gifts can be structured for a quick payout to the person you want, which is the best strategy.”

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