Inheritance and other windfalls: Specific considerations

Unplanned and unmanaged inheritances have a way of eroding very, very quickly. How a client receives their money will have an impact on the planning you will do. 

Advisors say, typically, if a client has received a gift of cash, planning is easy. The other means of getting money – from an estate or an insurance claim – can be very different worlds. 

The planning you do will also depend on the person’s before and after net worth. For a client who is worth $10-million, for example, and is receiving an inheritance of $50,000, there may be very little to talk about. At the other end of the spectrum, says Peter Ficek, Calgary, Alberta-based Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) with Terra Firma Financial, if the same $50,000 inheritance were coming to a client with no other net worth, the windfall deserves a better plan. 

“I would say a plan is a must for a person like that. The challenge may be how much to charge for this plan, but the plan will also not be very complicated,” he adds. 

People coming to you with a windfall will also have already spent some of their money mentally. “It’s not unusual that they come in with their own preconceived notions about where the money is going to go,” says Toronto, Ontario-based advisor, Jason Pereira, CFP and Registered Financial Planner (RFP) with Woodgate Financial Inc. Pereira is also a Chartered Financial Analyst who holds the Trust and Estate Practitioner designation, as well.

One thing to be perfectly clear about, he says, is whether or not the money is free and clear for spending. 

“If it’s a gift, there’s no problem. But if it’s an inheritance, let’s say the client is an RRSP beneficiary, if the estate doesn’t have sufficient money to pay the tax, they’ll come back after the beneficiaries for the balance. That’s something to be cognizant of,” Pereira says, adding that it is generally wise to wait until an estate’s final taxes are filed, lest the Canada Revenue Agency decides it is still owed money by the estate’s beneficiaries. 

In looking at a windfall, it is also important to determine if the check is a one-time amount, of if it is the first of several. Brad Brain, CFP and RFP with Fort St. John, British Columbia-based Brad Brain Financial Planning Inc. points to the professional athlete who’s just signed his first contract as an example. “If he’s going to be making good money for his playing career, that’s a little bit different than a lottery winner who maybe has $500,000 and that’s it. I think the good, general rule is not rushing anything unless there’s something that needs to be done.”

Finally, although the money may come in a life-altering sum, if the client were dependent on the windfall’s source (the bank of Mom and Dad, for example) for ongoing support, clients may need to be reminded that their windfall is in fact a finite amount. 

“If they were turning to the bank of Mom and Dad to get support, even though their parents were in their 70s or 80s, the important message is that playbook is over now – this is the last you’re going to get. You need to be beyond diligent now,” Pereira says. 

Beware the big house purchase 

Impulsive client purchases can be obvious to spot (the sports car or the $100,000 truck) but there are other decisions that are as equally driven by emotion that are also not the savviest ways to “invest” money. Buying a house is one example. 

Pereira points out that conventionally, when people buy a house, they look at the mortgage payment. “No one looks at the actual full cost of ownership,” he says. 

“I’ve seen it happen more than once where, at the windfall, they basically went out to buy the biggest house they could. There’s a difference between inheriting a lump sum and an income stream. The last thing you want to do is put yourself in a worse situation than when you started because you got a large sum of money.” — Jason Pereira