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Coming into “sudden money” – whether through an inheritance, severance package, or selling a property for more than anticipated – can be overwhelming for clients as it seems every professional wants a piece of them, starting with the financial institution that received the hefty deposit.
Many turn to their advisors for help to make sense of their options for a large windfall.
“The first step for the client is to not do anything, not make any quick decisions,” says Robin Taub, a chartered professional accountant at Robin Taub Financial Consulting in Toronto. “Before even meeting with an advisor, the client should think about their values, what’s important to them, and how the money can help them live the life they want.”
In fact, David Christianson, senior wealth advisor and portfolio manager with Christianson Wealth Advisors at National Bank Financial Wealth Management in Winnipeg, says the first thing he advises clients in this situation to do is breathe.
“I tell them to take some time and explore possibilities that might not have ever entered their mind before,” Mr. Christianson says.
Understand emotions behind the money
Robyn Thompson, president and certified financial planner at Castlemark Wealth Management Inc. in Toronto, says many clients experience intense emotions – usually grief or joy – about their windfalls.
“If it’s an inheritance, for example, they feel the hard work of the people who left them the money,” she says. “Clients want to continue to provide growth and be able to manage it responsibly.”
After understanding the emotions behind the money, Ms. Thompson then creates a comprehensive financial plan for these clients.
In that process, she discusses the clients’ goals for the money and their financial circumstances. She believes any high-interest debt should be at least partially addressed with a windfall.
Ms. Thompson notes that in this inflationary environment, more clients are “not interested in sitting in cash and seeing their principal eroded.” Instead, they want to put together a properly diversified portfolio that matches their risk tolerance and objectives.
“I educate them on the value of the money now and what it can be worth in five, 10, and 15 years with proper planning,” she says.
How best to use tax planning strategies
Ms. Thompson also looks at unused contribution room in tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) as possible vehicles to reduce taxes.
Knowing precisely where the windfall came from helps Ms. Thompson determine the best strategy. For example, in some cases, severances may be able to be rolled into a registered plan to defer taxes.
Similarly, Mr. Christianson says he also places a priority on tax deferral and reduction.
He notes that if a client’s severance is received near the end of the year, negotiating with the employer to receive the money the following year instead defers any tax liability to that year.
“On the other hand, if the client has been out of work for most of the year and just started another job that’s paying better than the previous job, you want to get the severance that year as it’s a low-income year,” he says. “You’ll pay the tax sooner, but at a much lower rate.”
Reducing taxes is also top of mind for situations like the sale of a second property or stock options as they will inevitably be taxed as capital gains. He’ll consider if they have any carry-forward contribution room in their RRSPs to lower their tax bill.
Mr. Christianson says it’s a bit easier meeting with clients who already have up-to-date financial plans because their priorities have been established.
Of course, priorities and goals can change when receiving sudden money. A client may have always wanted a house or condo, for example, but couldn’t afford it, and now has enough money for a down payment.
“Perhaps clients hadn’t included some goals before because they knew they didn’t have the resources,” Mr. Christianson says. “So, it’s important to ask open-ended questions around that.”
In either case, he’ll always ask clients, “Are you interested in seeing what a difference this money would make toward your retirement goal, paying off debts and relieving your monthly cash flow?”
He finds almost everyone wants to crunch the data to know precisely where they stand financially.
“They want to know the difference it makes before they treat themselves,” he says. “So, then if they do buy that car and take that trip, they’re going to do it without guilt because they made that decision with full information on their financial circumstances.”
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