Three steps to managing a large inheritance

By , On , In General

Inheritance can have a huge impact on how you live your life today, your plans for the future, and your opportunity to pay the generosity forward to your loved ones. This is definitely a time for some objective advice from a financial management firm with experience and expertise in intergenerational wealth management.

Taking the right steps, in the right order, can be the best way to ensure that you and your family make the most of your new-found increase in wealth. People who receive large and possibly game-changing sums of money typically benefit from financial advice and following a three-step approach.

Cooling off and unpacking

Inheritance often arrives at an emotionally charged time in life. This is typically not the time to make long-term financial decisions. But that shouldn’t stop you from seeking advice and beginning to unpack the details of a Will. Sometimes, the contents are straight forward and the benefactor has provided clear, written instructions on how assets are to be divided and directed. Other times, Wills are vague and information is incomplete. An early review sets the stage for the work to be done and identifies any urgent needs such as a “tax time-bomb”.

Settling all accounts

The first review of a Will, the unpacking stage above, typically reveals all the tasks that need to be completed in the short term. Estate taxes will inevitably be part of the process and those things need to be addressed in a timely manner. It’s not uncommon in parts of Canada for people to inherit large estates comprised mostly of non-cash assets. For example, the family farm or other real estate assets may comprise the bulk of the inheritance. If the benefactors did not leave enough liquid assets to cover taxes, there could be a short-term cashflow crisis.

At times like these, well-intentioned friends and relatives can become arm-chair quarterbacks and recommend some bad plays such as liquidating assets to pay tax bills. While this might be necessary in some cases, it isn’t the only option. An objective advisor can suggest a range of ways to settle tax bills and other obligations that may preserve more family assets.

Moving on with a clear direction

Whether you are adding an inheritance to an existing financial plan or taking this opportunity to create your first comprehensive plan, it’s important to re-evaluate your expectations about your future lifestyle. It’s time to look at all your financial priorities and decide which ones you can advance, when using your new-found wealth. An advisor can determine if there are any tax advantages to slowing integrating money into your registered accounts over time. These decisions can be fairly black-and-white based on your income level and any contribution room you may have in your RRSP or TFSA. Other decisions may be more complex and emotionally challenging. For example, gifts to charities and organizations need to be planned and executed with great care in order to make the most of your donation.

The most important lesson

Most people who have had their financial future altered by inheritance and have gone through the three steps above will attest to the relief that comes with knowing the wishes of their benefactors. At a time of high emotions and costly consequences, clarity is one of the most generous things we can leave behind.

We encourage everyone to have heartfelt conversations with loved ones about your wishes and how you want your achievements shared with others. It’s never too early.

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