How to handle windfalls, inheritances, gifts, estate freezes

“We should all be concerned about the future because we will have to spend the rest of our lives there.” — Charles F. Kettering (1876–1958), American inventor

Will a lifetime of work help the next generation’s financial security? Let’s imagine.

Boomers and younger generations often receive cash and other financial assets from several sources. Three popular ones come to mind, such as inheritances, gifts and estate freezes. Let’s call them wealth transfers or windfalls. Some are modest while others are substantial. All ought to be much appreciated.

In Canada, the value of transfers is estimated to exceed $1 trillion. Similarly, the US ballpark is likely higher than $10 trillion. These windfalls serve as a welcome boost for ageing boomers. Especially where the nest egg is in need of a little help.

Inheritances consist mostly of family homes, cottages, land, income properties, stocks, bonds, mutual funds, family businesses, cash and term deposits. Gifts typically include cash and equivalents, savings and a variety of deposits. An estate freeze often involves private companies, family businesses, farms, income real estate and family trusts.

Don’t make any snap decisions that cannot be reversed. Don’t sell things you now own or buy anything new, like stocks or real estate.

Receiving a wealth transfer is like winning the lottery. We are human and can fall prey to emotional, spur of the moment decisions. Avoiding the pitfalls of dealing with our exuberant feelings of sudden wealth is not always easy.

No need to rush

Your main key to successfully receiving a wealth transfer is how the new assets are allocated. Therefore, review your needs and goals, along with the specific wishes of the kind person who made the welcomed bequest. Fortunately, most family members don’t stipulate many directions about how the transfers should be utilized. Instead, they simply want the family to benefit and make life more enjoyable for their loved ones.

The answers to the puzzle are found by contemplating what is important about one’s situation. The first action steps are the most critical when dealing with a wealth transfer. A little long-term thinking before making the allocations is indispensable.

Preservation of capital and making it last is on the minds of many. Planning for one’s own retirement is a top-notch assignment. Generating a lasting income stream from the funds is also a vital priority.

Park and think

I have a simple approach to wealth transfers that continues to serve well. The first step is to park the cash portion in a saving account, out of sight out of mind. Then leave it untouched for three months or more while you craft a personal game plan on how to deploy all the newly acquired wealth.

Don’t make any snap decisions that cannot be reversed. Don’t sell things you now own or buy anything new, like stocks or real estate. Consult the family and other beneficiaries on their objectives for assets that have to be split. Seek professional counsel to help clarify legal, investing and taxation issues on your plate. Particularly when a business is part of the transfer.

Be careful about co-mingling the new assets with your spouse or in joint accounts. Above all, don’t rush into anything, no matter how appealing it appears. You should be ready to start making informed decisions after three months. However, don’t feel pressured to act if taking more time is in your best interests. Time is also well spent on a detailed review of the estate planning provisions that apply to your situation.

Possible allocations

These allocation tips are worthy of consideration:

  • Adding to the family emergency fund to handle unexpected financial events.
  • Repaying credit cards, credit lines, mortgages and student loan balances.
  • Funding your home, charitable donations and special needs are worthy causes.
  • Attending to the TFSA/RRSP/RDSP contributions and catching up on unused room.
  • Loaning money to your spouse at the prescribed rate for income splitting.
  • Contributing to the family RESP for the children or grandchildren educational costs.
  • Gifting or lending cash to adult children for their TFSA/RRSP or home purchase.
  • Allocating resources to the family legacy, investment plan and retirement fund.
  • Treating the family to a special celebration or vacation.
  • Doing something unexpected for a less fortunate family member, friend or colleague.

Too many wealth transfers are often wasted for lack of some sensible planning. It happens all too easily and frequently. Prioritize my tips in the order that best suits your objectives. Always keep in mind what is most important to your family, both for now and in future.

Last thoughts

Receiving a wealth transfer is a terrific opportunity to improve financial security. It can make a substantial difference, such as in assisting the family plans for a lasting retirement. Someone about to deal with a wealth transfer ought to stop and reflect on all the implications for the personal circumstances. More importantly, how one wishes to fare in the future.

Too many have made quick, emotional and often inappropriate decisions about the new wealth. Sadly, it does not take long for regrets to overwhelm. A wealth transfer can be a tremendous boost to the nest egg, both in the short and long term. Thoughtful allocation of the windfall helps immensely.

 Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA  started in the investment and financial advisory profession in 1972. He graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971,  then attended the University of British Columbia, graduating with the MBA in 1972. This blog is republished here with permission from Adrian’s new website, where it originally appeared on June 27th

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