The Great Wealth Transfer: How to Prepare for What’s Next
You might be expecting an inheritance from your parents. If that’s the case, you’ll be a part of the Great Wealth Transfer that’s set to transform the lives of millions of Canadians. Here's why you and your parents need to be very clear about who gets what, and how.
KEY TAKEAWAYS
- The “Great Wealth Transfer” refers to the movement of an estimated $1-Trillion worth of real estate and cash from the Boomer generation to their children or grandchildren through inheritances, gifts, and life insurance.
- Having open conversations with your parents about their wishes and reviewing important documents can help reduce uncertainty and prepare your family for the future.
- An inheritance may include things like a home, a cottage, cash, a business, land, or a payout from a life insurance policy.
- Now is the time to think about how an inheritance will change your life and what kind of decisions you’ll have to make when the time comes.
- If you are named as a beneficiary, be sure you understand how that money will help you pay bills and cover costs while you take time to settle their affairs.
What is the Great Wealth Transfer?
Wealth has typically trickled down from one generation to the next. What makes the current situation in Canada so unique is the sheer volume of money, real estate, and investments that Baby Boomers are about to hand over to their Millennial children or Gen Z grandchildren.
For the lucky recipients, this will likely be a game-changing amount of wealth. A study by Ipsos determined that boomers who work with a financial planner expect to leave their children a whopping $1,134,000 (source). That could be in the form of:
- Real estate
- Land
- A cottage
- A business
- Cash
- Investments
Or all of the above. However, the same study reported that Millennials expect to receive an average of only $309,000. Why the gap in expectations? In cases where the inheritance would be split among several siblings, this estimate makes sense. But in households of two children or fewer, it’s likely because parents and their kids are not talking about money. Let’s change that.
Why the Great Wealth Transfer matters to you
Suddenly coming into a large amount of money won’t change who you are. You’ll just have greater responsibility and more temptation to buy things you can’t afford. And while it’s fun to imagine what you might do with a cash windfall, it’s also important to think about how you can keep more of it – by minimizing taxes and making money by investing in the long term.
How to start the conversation with your parents
Discussing money is a good habit that many of us form over time. It gets easier and more effective the more you do it. In your first chat with your parents, simply find out if they have documented their wishes, where to find important documents, and what gaps exist in their current plan. Below are six greater conversation starters.
| Question to ask your parents | If yes... | If no... |
|---|---|---|
| Do you have an updated will? | Great. Let them know you’ll need access to the original, signed copy. | Tell them it’s time to make a will. If they are Serenia Life members, they can start here or here. |
| Have you named an executor (i.e. the person who settles financial affairs on behalf of a deceased person) for your will? | Good. Ask for the contact information and store it somewhere safe. Make sure they have access to the signed copy of the will. (In many cases, parents name their adult children as their executor. In that case, make sure you have the legal documents you need!) | Encourage your folks to name an executor when they create or update their will. |
| Have you documented your end-of-life wishes? | Perfect. Review them together and make sure you understand the details. | Ask them about things like their burial wishes and how to plan their memorial. |
| Are your important documents in one place? | Good. Find out where and ask if you can review them. | Agree on a safe place to store document you’ll need access to, like the deed to their home and their life insurance policy. |
| Are your wishes for how family property/ies will be shared in writing? | Great. That will help to prevent disputes or arguments later. | Ask them to start putting everything in writing and include it with the other important documents. |
| Do you work with any advisors? | Perfect. Get the contact information for their insurance, wealth, and estate advisors. | Encourage your parents to ask a professional to double-check their plans for tax consequences and potential savings. |
If the questions above result in a lot “no” answers, your folks may need a gentle nudge to get their affairs in order. The newest benefit we’ve added to our collection, Empathy’s LifeVault™ Will & Powers of Attorney Benefit, makes it easy for Serenia Life members to create and store legal documents – at no cost! If your parents are members, and their needs are not complex*, it’s a great place to start.
*It’s always best to consult a lawyer.
Best practices for planning your first money chat
There are many reasons why your parents may not want to share all the details of their finances with you. To ease them into the process of being open about money and their plans for the future, try these best practices.
Focus on their needs
Let your parents know that your intention is to help them settle their affairs. Don’t make it about you and what you stand to inherit. This way, you are more likely to be seen as an ally.
Choose the best place
Pick a place where you’ll have plenty of privacy and set a time limit. Getting out of the house, going for coffee, or asking your financial advisor to host the meeting are all good approaches.
Respect their privacy
Your parents may not be comfortable sharing every detail of their finances with you. Take what you can get and respect their wishes for certain things to remain private. Just make sure you have access to important information after they’re gone – whether they’ve been stored in physical safe or a virtual ‘vault.’
Don’t make it all about money
Show your parents you care about respecting their final wishes. Ask about big things like who they appointed as their power of attorney in the event they can no longer make decisions about their health or finances. And little things like song playlists, location of important passwords, and their friends’ contact information become very important when you make plans for a memorial.
What to do when you receive an inheritance
If you’ve been discussing money and documenting your parents’ wishes, your inheritance will not come as a surprise. You’ll be organized, in control, and ready to take your turn as the new manager of your intergenerational wealth. But be cautious – your newfound money could slip through your fingers due to poor choices or a lack of knowledge.
Follow these steps so you can enjoy your new wealth and watch it grow to even greater heights.
Pause and reflect
Money doesn’t go bad. There’s no rush to spend or invest it. You’ll be glad you avoided hasty decisions later.
Understand what you’ve inherited
Inheriting cash is easy. But if your parents leave you something complicated, like a rental property, you suddenly become a landlord with expenses to cover and taxes to pay. Get expert advice on how your new wealth needs to be managed and how it will be taxed.
Revise your financial plan
How you spend, save, and invest your inheritance is a balancing act. You can pay off debt, turbo-charge your retirement savings, and set your own children up for success. Review your options with a qualified advisor to make the best long-term decisions.
Get good advice and follow it
An objective advisor can give you the kind of unbiased advice you need when it comes to managing an inheritance. They will look at your situation from the perspective of both tax planning and how to make your money grow.
Friends and family can be a great source of comfort during a time of loss but they may not be qualified to help you manage a major change in your finances. Your Serenia Life advisor can provide wise, timely advice on the best way to manage intergenerational wealth challenges.
Common mistakes during wealth transfer
When you get good advice and you follow it, you’re going to keep more of the money you inherit, reduce the amount of tax you pay, and increase your family’s financial security. The first step to achieving these goals is to avoid the following mistakes:
Spending too quickly
Paying off debt and buying a few things you’ve always wanted are natural reactions when you come into money. But postponing these impulses until you have a solid plan to manage your inheritance will almost surely pay off in the long run.
Failing to invest
There are many ways to invest money so that it increases in value or provides a tax-free benefit to your family. Most well-balanced financial plans include a variety of investment options paired with permanent life insurance to guarantee long-term success. Your Serenia Life advisor can help you to create a reliable intergenerational wealth plan for you and your family.
Ignoring or not understanding tax implications
Some of the things that your parents plan to leave you are subject to tax. You won’t know the true amount of your inheritance until your parents’ executor has paid the government for items like:
- Your parents’ final income tax bill, based on what they earned in their final year
- Taxes on non-registered investments that have increased in value
- Tax on a non-primary residence, like a cottage or hobby farm
Taxes are another great reason to repeat point #1: Don’t spend too quickly.
Not revising your financial plan
All of the goals and timelines outlined in your current financial plan need to be adjusted when you come into money. An advisor may recommend shifting your priorities and rearranging your investments to minimize tax.
If you don’t have a written financial plan, talk to a Serenia Life advisor and get it done for free. That’s one of the many ways we’re here to help throughout your life.
Not developing your own estate plan
Once you become the new keeper of your family’s wealth, it’s your responsibility to make sure that future generations prosper and get the same kind of financial leg up.
Poor communication with family members
Inheritance can lead to intense conflict between siblings or blended families, especially if someone feels blindsided, left out, or treated unfairly. Ideally, you’ve all had the family money chat and there are no surprises.
The role of life insurance in the Great Wealth Transfer
If your parents were the kind of visionaries who wanted you to inherit tax-free money, they probably bought some form of term life insurance or permanent life insurance.
That’s because as the beneficiary of a life insurance policy, you’ll receive a tax-free lump sum of money, usually within days of filing the claim. Access to cash is important for many reasons. It provides an immediate blanket of financial protection against all of the challenges that can accompany a loss. For example, you can:
- Wait out the legal process of settling your parents’ affairs, which could take up to 18 months
- Cover any taxes or fees that may be due before you and any other beneficiaries can consider distributing the inheritance
- Pay capital gains tax (i.e., taxes due on things that went up in value, such as investments or real estate)
- Maintain the cost of running a family business while you decide if you want to keep it
If your parents have permanent life insurance, and you are the beneficiary, this may change the way you manage your money while they are still with you. For example, you may put less money into retirement savings and spend more on life insurance coverage for your children. A Serenia Life advisor can review your parents’ policy and clarify how it affects your financial plan today.
Turning an inheritance into a legacy
Anyone who says, “It’s only money” is failing to see the powerful ways money can be put to use, like creating a family legacy and helping others achieve their social and philanthropic goals. For example:
- Investing your inheritance for the long-term, generating even greater family wealth
- Protecting the wealth you have through financial planning and insurance
- Setting your kids up for success through an education savings plan
- Including charitable giving as part of your annual financial and tax plan
Lastly, consider setting up your own intergenerational wealth transfer plan to keep the cycle of care and compassion going when it comes to your loved ones.
Why should you choose Serenia Life for wealth transfer strategies?
As a member-based organization that’s been around for nearly 100 years, we encourage kindness by sharing our profits through community outreach, fundraising, and unique member benefits that help Canadians support their family, their community, and the causes they care about. Benefits, such as:
- Award-winning loss support through Empathy
- $2,500 post-secondary scholarships
- Up to $600 towards fundraising events, and up to $400 for volunteering expenses in Canada
- Financial support when you draft or update a will through a lawyer
- And much more!
View a full list of our member benefits.
Frequently Asked Questions
How do I talk to my parents about inheritance?
Should I pay off debt or invest an inheritance?
Do I have to pay tax on an inheritance in Canada?
How can life insurance support wealth transfer?
How can I preserve inherited wealth for future generations?
What happens if my parents don’t have a will?
What is an executor?
What is a Power of Attorney?
Book a date for your family money chat today
Now that you know the importance of talking to your parents long before it’s time to receive your inheritance, it’s a great time book them in for a chat with you and a Serenia Life advisor. Explain why you want to have ‘the talk’ and encourage them to read our part 1 in this series, It’s Time to Talk About the Intergenerational Wealth Transfer.
Want to learn more about intergenerational wealth transfer?
MNP
Why receiving part of your inheritance early could kick-start a lot of your plans, like putting a down payment on your first home: A Guide to Gifting Money to Children
MoneyTalk
From timing and tone to setting the stage, here’s how to make money conversations a little less awkward: A Practical Guide for Families
Serenia Life Financial
Here’s how setting money aside today can give your loved ones access to instant cash: It’s Time to Talk About the Intergenerational Wealth Transfer (Canada)
Disclaimers
This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a qualified professional before making any final decisions. Serenia Life Financial does not advise clients on tax, accounting, or legal matters.
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