Telling your kids that an inheritance is coming can allow them to enjoy it earlier.Malte Mueller/iStockPhoto / Getty Images
Receiving an inheritance can be a financial game-changer. And while it’s nice to receive an unexpected inheritance late in life, it’s even nicer to be able to build this money into a financial plan early on.
For parents who expect to leave money, surprising offspring with it after they are gone doesn’t give the children the maximum benefit – talking about it ahead of time is better.
Generally speaking, people receive an inheritance from their parents when they are in their 50s. Some won’t receive it until their late 60s or even into their 70s. Usually by then people have worked hard to save for retirement, and an unexpected inheritance can end up being extra money they don’t actually need.
By telling your kids that an inheritance is coming, they can enjoy it earlier. In the years when they are building a career, raising kids and buying a home, money is often tight. That’s when it’s tough to find money for big savings goals such as retirement and paying for the kids’ education.
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Incorporating an inheritance into your children’s savings plan can give them leeway with their cash flow. By reducing the amount they have to save, they will have more to spend on housing, childcare or just generally enjoying life. This is often what parents I meet with want for their kids.
It’s likely that you won’t know exactly how much you will leave in your estate because there are a lot of factors at play, including how long you will live and how much money you will need. But by a certain age – maybe 65 or so – most people have a general sense of what they will leave behind. Even giving a ballpark figure is helpful.
Early gifting
If you really want to maximize the joy you get from giving an inheritance, you can also gift the money while you are still alive. This will allow you to see for yourself just how appreciated and helpful your gift is.
Giving money early also has an emotional benefit for you and your children. Generosity has been shown to make people happier. Giving feels good, especially when you can see the results.
For your kids, the emotional benefits are huge because you’re not just giving the gift of money – you are also giving the gift of financial security and lower stress.
Financial benefits
An early inheritance also makes financial sense. By giving the money now, you will leave a smaller estate, which will lower the probate fees your estate will have to pay. Probate fees vary from province to province, but all are calculated based on the value of the estate – the larger the estate, the higher the fee.
You can also potentially lower the taxes payable on this money. If you are investing these funds, you’re probably earning some income. This income is taxable to you. If you gift the money to your children, you shift the investment income to them.
Depending on how much income you have and how much income they have, this might lower the taxes being paid on the investment income. This might be especially relevant if you have grandchildren that you’d like to give to, since they may be earning less income and be in a lower tax bracket than you.
Of course, you need to think carefully before you start handing out your money early. It’s essential to make sure you have enough to support yourself throughout your lifetime, and you should plan for large expenses such as long-term care.
You also need to consider the age, personality and circumstances of your kids’ lives. Receiving an inheritance at a young age has its downsides – too much money early on can dampen a person’s ambition and motivation.
You are the best judge as to whether receiving an inheritance or even knowing about it would be good for your children at this point in their lives or not. If not, sideline it for now, but do come back to it when the time is right.
Anita Bruinsma is a Toronto-based certified financial planner at Clarity Personal Finance.
