Estates: What should you do with your inheritance?

What’s the first thing you should do when you receive an inheritance?

Take some time to evaluate your needs and priorities. These will vary from one person to another depending on your financial situation and the amount of the inheritance. Your age, savings, and debt also factor into this.

However, paying off debt before making any major purchases or investments is one piece of advice that applies across the board. Pay off any high-interest personal debts like lines of credit, loans, and credit card balances. Low-interest debts, such as student loans, and debts with tax-deductible interest are less of a priority.

What products should you invest your inheritance in?

You can invest your inheritance in different vehicles and types of investments. Depending on your situation, you could:

• Max out your Tax-Free Savings Account (TFSA)
• Contribute to your registered retirement savings plan (RRSP) If you’re married, bear in mind that RRSPs are automatically included in the matrimonial property, so your spouse will have a claim to it if you separate.
• Contribute to a tax-free First Home Savings Account (FHSA).
• If you have children or grandchildren, a registered education savings plan (RESP) is another option to consider.
• You may also want to consider the registered disability savings plan (RDSP) or purchasing an annuity or a personal insurance policy.

How long should you wait before deciding what to do with an inheritance?

The estate settlement can take up to a year. This gives you time to think about how to make the most of your inheritance and meet with your advisor to build an investment plan.

Receiving an inheritance carries the added weight of the loss of a loved one. Potential investment opportunities may arise, however, it’s important to take your time throughout the grieving process and avoid making an impulsive decision with your inheritance.

Do you need to set aside some of the inheritance to pay for the funeral?

Funeral costs are generally paid for using assets from the deceased’s estate before it is divided among the heirs. If the estate settlement process is handled properly, you won’t have to set any money aside for this purpose.

Is your inheritance taxable?

In Canada, money you inherit isn’t taxable.

Tax on the estate is paid before the executor distributes the assets, i.e. before you receive your inheritance.

How can you use an inheritance to help your family?

Although an inheritance is theoretically untouchable, using it to pay off a joint debt or giving a portion to your spouse is not advisable.

If you're married in Quebec and use the money to contribute to the family estate (e.g. by buying a house), you can get your contribution back in the event of divorce. You will need to ensure that the money is paid into a separate personal account.

This doesn't apply in other provinces, as well as for common-law spouses in Quebec. If you use your inheritance to pay a joint mortgage, you likely won’t be able to get this money back if you later separate. One way to resolve this is to draw up a cohabitation agreement with a clause acknowledging one partner’s contribution using their inheritance.

You may want to use your inheritance to benefit the younger generations in your family by opening a registered education savings plan (RESP). Money invested in an RESP grows tax-free and can be used for your children’s or grandchildren’s education.

Another option is to purchase life insurance for your children or grandchildren. This product is often quite affordable. Once they reach the age of majority, the children will become the holders of the plan.

If you inherit real estate, should you sell it?

If you’ve inherited a property, there’s a decision to be made.

If you decide to keep the property in your name, bear in mind that you may have to carry out maintenance or renovations and take on other major responsibilities. But this could be a profitable choice, for example in the case of a rental property.

If you’re not interested in managing or occupying the property, you may decide to sell it and invest the proceeds.

Don’t hesitate to ask your advisor for help evaluating the different scenarios so that you can make an informed decision.

Should you update your will when you receive an inheritance?

Whether you’ve received an inheritance or not, you should update your will whenever there is a change in your financial or family situation.

Regardless of your financial situation, having a will helps avoid potential conflicts by putting your affairs in order. Whether for your own peace of mind or to make life easier for your loved ones, don’t hesitate to talk to an estate planner or trust professional, a notary, or a lawyer.