An education member’s guide to giving and receiving inheritance money early
Whether you’ve just begun your education career, or are now enjoying the ‘after school’ years—we’d like to talk to you about money.
After all, ‘money is what makes the world go round’—at least according to the old proverb (and the musical Cabaret). And that world will keep on spinning, long after you’re gone. But that’s okay, because it’s the natural order of life. Just as passing on inheritance money is typically something that is only done after someone has passed away.
However, waiting until then could mean missed opportunities for the loved ones left behind.
In fact, over the next decade, Canadians between the ages of 50 and 75 are set to inherit an estimated $750 billion. That’s a sizeable amount of inheritance money with the potential to help those heirs a whole lot sooner.
Enter the benefit of gifting that money early (also known as a ‘living inheritance’).
If you retired at the top of the pay grid, chances are you’re collecting a healthy pension. Depending on your circumstances, you could also find yourself with a sum of money over and above what you need to maintain a comfortable lifestyle (i.e. if you retired debt/mortgage-free or accumulated investment income over the years).
Gifting some of that extra money now enables you to offer your loved ones financial support when they need it the most.
For example, if you have children or grandchildren in their late teens or early 20s, this is a period when they are faced with unique financial challenges, such as paying for post-secondary education. Upon graduation, it can also take a while to pay off any student loans and other forms of accumulated debt—potentially delaying the ability to save up for a down payment on a home, or get married and start a family. This is where providing a monetary advance on their inheritance can make a world of difference.
Plus, you’ll have the satisfaction of seeing and guiding the impact of your financial gift.
Paying off student loans. Purchasing a first home. Investing for the future. A living inheritance means being around to see your loved ones achieve major financial goals and milestones (thanks to you). In addition to sharing the wealth, you’ll also be able to share your wisdom to ensure your financial gift is being used wisely.
‘Early gifting’ of inheritance money also encourages a conversation surrounding estate planning.
According to a survey conducted by the Investment Planning Council of Canada, 58% of Canadians holding a minimum of $500,000 in investable assets each had not discussed estate instructions with their heirs—while 12% had absolutely no intention of having this conversation. This could result in their final wishes regarding their assets not being carried out.
Giving your heirs a monetary advance through a living inheritance enables you to play an active part in the dissemination of your estate.
Your loved ones will then know exactly what’s coming their way. Furthermore, you will have complete peace of mind knowing the right people are getting precisely what you want to give them.
Estate planning: start with the essentials and learn what you need to know.
So, how should recipients of a financial advance on their inheritance be putting that money to use?
That depends on how much of an advance you’re getting and where you are in life (and in your education career).
In your 20s—when you’re typically lower on the pay grid:
- Pay down debt such as student loans, credit cards, etc.
- Maximize contributions to an RRSP and TFSA (you’ll want to start building wealth as early as possible)
- Save for (or make) a down payment on a home
- Open up investment/savings accounts for other short- or long-term financial goals (i.e. to build up an emergency or summer cash flow fund)
Educator-specific tip: Assuming you are an education member with a defined benefit pension plan in place, your RRSP contribution room will typically become more limited the further you progress in your career (i.e. the more your pension benefit increases in value, the less RRSP contribution room you’ll have). So be sure to refer to your Notice of Assessment, provided by the CRA each year.
In your 30s, 40s, and 50s—as your life changes and family grows:
- Maximize RESP contributions for every child you have
- pension credits for maternal/paternal/any other leaves you’ve taken
- Pay down/pay off your mortgage (but be aware of any penalties for paying off your mortgage early)
- Pay off other forms of debt
- Maximize your investment contributions
Something to keep in mind: In Ontario, a matrimonial home is generally subject to equal division in the event of a marriage breakdown. With that said, using your early inheritance money to pay down your mortgage could put 50% of your financial gift at risk.
In retirement—now that you’re collecting pension income:
- Pay off any leftover debt (such as a mortgage, loans, credit cards, etc.)
- Realize any goals you set for this time in your life
- Provide your children with a monetary advance on their inheritance(to help them achieve their own financial goals, sooner)
- Start an RESP/maximize contributions for any grandchildren you may have
- Give money to charities that are close to your heart (and benefit from a tax break in the process)
Since there are no restrictions on gifts in Canada, there are no limits to how much money you can give to your children and grandchildren as a living inheritance.
Just be sure to consult with a tax professional specializing in estate planning to ensure that you understand the tax implications for your exact situation. Like any other major financial decision, it’s also important to have a sound financial plan in place before taking action. Because all good intentions aside, you still have the rest of your life in retirement to think about. A financial plan will ensure you’re in the best position possible to gift money early, without compromising your own financial situation down the road.
If you’re looking for guidance when it comes to giving or receiving inheritance money early (or at any time for that matter), educator-specific advice is just a click away.
Since 1975, over 18,000 education members have turned to Educators Financial Group for unique financial solutions that offer a genuine understanding of their financial dreams and goals.
Have one of our financial specialists contact you today about your estate planning needs.
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