Reasons why you should not bank on an inheritance

Share

When it comes to factoring an inheritance into his retirement plan, 37-year-old Bahi Kandavel is doing the smartest thing he can: He isn't counting on it.

"It's not wise to live your life with an expectation because people change their minds and their priorities change and there's just so much that can happen," he says.

However, he does feel it's beneficial for children to discuss estate planning with their parents, if for no other reason than it might add a bit of foresight to the younger generation's retirement plans.

Mr. Kandavel, who worked in the United States for a number of years before returning to Toronto five years ago to found his wholesale energy trading company, Northstar Trading, understands that broaching the topic can be awkward, but it is a worthwhile undertaking.

"I think it is important to have that conversation."

While he adds that it doesn't necessarily have to be a detailed conversation, just to get an idea of parents' plans can be helpful. For instance, they may feel that they have already invested enough in their children by way of upbringing and education and may want to do something else with any money they have left over.

Thinking of his own family, Mr. Kandavel says his father passed away a few years ago and his mother lives comfortably, although she is not sitting on a huge nest egg. While his mother has mentioned in off-hand remarks that whatever's left will be split between Mr. Kandavel and his brother, a teacher, he also understands that things can change.

"In the case with my mother, in her retirement she's more involved in philanthropic work and her plan may be to bequeath what's left of her savings to charity," he says.

One way of approaching the conversation can be to put the emphasis on one's own situation, and seek advice from parents as to how they would improve upon it based on their own experience. That way it doesn't put them on the defensive; discussing things such as wills and power of attorneys can also kickstart the conversation.

"You start the conversation with, 'So I'm planning to go to the lawyer, this is what I'm doing, can you shed any light on any of the planning that I should be doing?'" says Carol Bezaire, senior vice-president of tax, estate planning and strategic philanthropy at Mackenzie Investments in Toronto.

"And then you can start talking about, 'Well, how does this compare, mom and dad, to what you've set up?' "

Employing this kind of less-confrontational tactic can pay dividends. However, Ms. Bezaire says that due to the diverse nature of Canada, some cultures will find this conversation easier to have than others, where talking about finances with one's elders is somewhat taboo.

It's also worthwhile having the conversation sooner rather than later, as any information could help in planning one's own retirement. But, much like Mr. Kandavel, Ms. Bezaire cautions against building a retirement plan on the foundation of receiving an inheritance.

In her work of putting together retirement plans for clients, she says that three times out of six, they say they expect to receive an inheritance. She says that an over-reliance on this can lead some people to put their lives on hold in anticipation of a windfall down the road.

"Those people, we call them the waiters, who are waiting for mom and dad to pass away and don't think they need to hold a job because they're going to get this inheritance," she says. "That's a trend that's a little troubling in Canada. Yes, but what are you going to do when you get the inheritance other than spend it?"

A Bank of Montreal report from 2014 found that two-thirds of Canadians expected to receive an inheritance, with the average amount being just over $96,000. Furthermore, nearly 75 per cent of respondents said they felt it important to provide an inheritance to loved ones.

A death in the family will always be a traumatic time, but even beyond inheritance, estate planning can be an important discussion to have with parents, to ensure that it results in family harmony and not discord.

For instance, if one child benefited from an expensive private education, or received help in buying a first home, while others didn't, how will the family finances be divided up after the parents die?

"I think the most important thing is engaging in that sort of discussion about estate plans with parents from the perspective of [ensuring] that their wishes will be followed through," says Chris Buttigieg, director of wealth planning publications at BMO Nesbitt Burns Inc. in Toronto.

While having a conversation strictly about inheritance amounts can make someone come off as seeming entitled, switching the focus of the conversation to that of ensuring a smooth transition through the process for the entire family can remove some of the awkwardness. In that sense, opening up the conversation to all family members can prove fruitful.

A BMO Wealth Institute report from 2013 revealed that 54 per cent of Canadians recognize that the most serious drawback of not having estate planning conversations is the potential for conflict among surviving family members. Not knowing how to bring up the topic was mentioned by 15 per cent of respondents as the reason they hadn't had a discussion, while 41 per cent said they hadn't got around to it yet.

But burying one's head in the sand isn't going to get anyone anywhere, so discussing estate planning as a family is a worthwhile endeavour.

"It prevents any hard feelings, any misgivings, any misunderstandings, that family meeting," Mr. Buttigieg says. "If anything, then it's going to touch on the whole issue of whether I'm going to receive an inheritance or not."

But whatever the resolution, Mr. Buttigieg recommends clients come up with two retirement-planning scenarios: one where they factor in an inheritance, and one where they don't.

"I don't think you want to pin your hopes on having your retirement funded by inheritance," he cautions.