Quick loss of wealth is a direct result of putting too much money in the hands of people who have no experience in handling it, experts saybernie_photo/Getty Images/iStockphoto
A 2006 Canadian Inheritance Study by Decima Research predicted that as much as $1-trillion would be passed down through intergenerational wealth transfers over the next 20 years. For many Canadian baby boomers, that wealth transfer is happening now.
For those fortunate enough to receive an inheritance from their parents, the first question is very likely to be, "What do I do with the money?"
Most Canadians who inherit money from their parents are juggling many financial goals. They may be paying off their mortgage and other debts and trying to save for retirement. At the same time, their children might still be in the house or pursuing post-secondary education. As much as the monetary windfall is welcomed, it also brings along some emotional baggage – when parents have worked hard to pass money down to their children, the recipients are often afraid of losing it.
"Often in these situations, the predominant concern with the newly-found pool of money is ensuring its safety," says Pat Chiefalo, managing director and head of iShares Canadian Product at BlackRock Canada.
While you might be tempted to help your children out with their school fees or a down payment on their first home, don't forget your own financial needs as well, says Gordon Pape, publisher of BuildingWealth.ca and author of several books about retirement. That could mean paying off your debt, not the debt of your children.
"We're seeing an increasing number of retirees going into that time of life carrying debt," says Mr. Pape. "That was unheard of a generation ago because paying off debt before they stopped work was a priority." A good use of inheritance money might be to pay off the mortgage and any consumer debt, he says.
"We've seen it again and again with people who get large inheritances or win the lottery; we read in the paper how they're broke in two years."
That kind of quick loss of wealth is a direct result of putting too much money in the hands of people who have no experience in handling it, adds Mr. Pape.
According to the 2015 BlackRock Canada Investor Pulse survey, many Canadians don't seek out financial advice when they come into money suddenly. Only 30 per cent of survey respondents – 2,000 Canadians between the ages of 25-74 – said they would seek advice from a financial adviser if they received an inheritance.
At the same time, most Canadians know they should be planning for retirement – 67 per cent of respondents said they are concerned that the high cost of living is a threat to their financial future.
While the temptation might be to upgrade your house or your car when you come into money, resist the urge, advises Mr. Pape. Instead, consider working with a trusted financial adviser who can help you come up with a plan for the money that addresses your short-term and long-term needs.
Debt repayment should be a top priority, but any cash windfall should also prompt investors to examine their portfolio, consider their retirement timeline and rebalance their investments. Do you need more fixed income investments? Should you be more aggressive in your investments? Should you top up your registered retirement savings plan (RRSP) or your tax-free savings account (TFSA)? These are the questions an adviser can help you answer.
Mr. Chiefalo says exchange traded funds (ETFs) might be a good option for those who have come into an inheritance because they're looking for funds that may provide a decent return but also potentially mitigate risk.
ETFs deliver market access and flexibility along with the ability to customize a portfolio suited to your individual needs and circumstances.
"They are a great place to park money, earn a potential return, and help protect against downside risk," he says.