You suddenly receive tens or even hundreds of thousands of dollars. It is a scenario that many people secretly wish for, and for an increasing number of people (especially baby boomers) it is becoming a reality as their parents—now in their eighties and nineties—are inevitably dying, leaving their heirs sizable inheritances.
Unlike boomers (many of whom love to spend their money), their parents were much more likely to be savers than spenders. This ‘saving’ mentality is what is providing many boomers with inheritances of significant value. Handled correctly, these gifts from parents to adult children can be life changing. Handled incorrectly, the money can slip through people’s fingers with very little to show for it in the end.
I have noticed in my practice that inheritance money is much more easily spent than money we ourselves earn. So, it is very important to put a reasonable plan in place for this money before you begin to spend it. There is nothing wrong with including your wish list items in your spending plan, with the approximate cost of each. However, if your wish list adds up to the total of your inheritance you may need to rethink those plans.
Your new found wealth can actually change your life for the rest of your life, rather than just a few years. Since money invested wisely usually makes more money, it might make sense to invest some to fund your future pleasures. You may be able to keep the capital and just take income from the growth of the investments to provide for your wish list items for years to come. The inheritance needs to be looked at in context of your entire financial plan; including when you want to retire, how much retirement income you will need, and other possible future needs.
You should also note that under Canadian law (except in Quebec), the proceeds of inheritance does not constitute family property under the Family Law Act. That means as long as you keep your inheritance assets separate (i.e. in a separate account in only your name) from family assets, your spouse cannot claim half of your inheritance in the event of a divorce. If you’d like to pay down your mortgage or do some much needed home renovations, we often suggest using only some for family purposes, and keeping the rest of your inheritance separate.
So if you receive an inheritance, look at it as a responsibility, not just a reason to become a jet setter for a year. Secure your future and honour your parents’ hard work by having a sensible plan for how you are going to handle your newfound wealth. Professional help is recommended.