What should you do after receiving an inheritance? Financial expert weighs in

Freeland: Over 250K Canadians have opened a FHSA Finance Minister Chrystia Freeland said on Tuesday, that over 250,000 Canadians have opened a First Time Savings Account.

Did you recently receive an inheritance, or are you expecting to collect one soon? Whether the value of your inheritance is large or small, it’s important that you make the most of it.

An inheritance can include money as well as investments and other assets, such as real estate. Discussing what you will inherit ahead of time and outlining plans for what to do with any extra money is more important than ever, especially in today’s rapidly changing economic landscape.

Although Canada’s inflation rate fell from four per cent in August to 3.8 per cent in September, it remains well above the Bank of Canada’s two per cent target, and many Canadians continue to struggle with a high cost of living.

I’ll explain what you should do after receiving an inheritance and provide some helpful tips on how to handle the extra money.

WHAT SHOULD YOU DO AFTER RECEIVING AN INHERITANCE?

The most crucial piece of advice I can offer after receiving an inheritance is not to rush.

It can be tempting to immediately spend or invest money you’ve inherited. Depending on your family situation, you may have been told about your inheritance in advance or it could come as a complete shock, especially if the individual’s passing was unexpected.

Ideally, the person granting the inheritance should have completed the Canada Revenue Agency’s estate planning checklist or worked with an estate planner to:

It’s important to note that inheritance laws and regulations can vary by province and territory. But generally, if you’re the beneficiary of an inheritance, you should be contacted by an executor, the legal representative appointed to execute a will.

This representative is responsible for communicating with beneficiaries, handling legal paperwork, and transferring the inheritance to the listed recipients.

ARE THERE ANY TAX IMPLICATIONS?

One of the first things you’ll need to do after receiving an inheritance is prepare for any taxes that may need to be paid. Any money that is owed must be paid out from the estate assets before the remaining funds are transferred to the beneficiaries.

Canada does not have an official inheritance tax and many assets, such as tax-free savings accounts (TFSAs), certain life insurance payouts, and personal property, can be passed on to beneficiaries without tax.

For taxable assets, such as real estate or certain investments, the CRA will take out their share of taxes before leaving you with the rest of the money. For this to take place, the executor must submit a final tax return for the deceased and determine the tax liability. After this is done, assets are distributed among the beneficiaries.

If you’re still unsure about your tax liability, it’s best to contact a tax professional to avoid running into any surprises.

HOW SHOULD YOU USE YOUR INHERITANCE?

Not sure what to do with your inheritance? Here are a few smart ways you can spend or invest this money to get the most out of it.

1. Invest in tax-advantaged accounts

Money received from an inheritance in Canada is not considered taxable income. Despite this, it’s still a good idea to put this money towards maximizing your contributions to tax-advantaged accounts, such as:

All of these accounts can be used as investment vehicles and allow your money to grow in a tax-deferred or tax-free account.

2. Start a business

Have you always wanted to start a business? Instead of applying for a small business loan, potentially risking your credit and paying high interest rates, you can use your inheritance as a way to start your entrepreneurial journey.

Just be sure you do your research and create a solid, actionable business plan. You shouldn’t jump into any business venture blindly.

3. Contribute to your child’s RESP

It’s never a bad idea to invest in your child’s future by opening or contributing to a registered education savings plan (RESP).

Although RESP contributions cannot be deducted from your taxable income, these payments could make you eligible for the Canada Education Savings Grant (CESG), which provides free government money that your child can use once they start their post-secondary education.

4. Set money aside for an emergency fund

A recent survey commissioned by the Healthcare of Ontario Pension Plan (HOOPP) revealed that 44 per cent of participants between the ages of 55 and 64 said they have less than $5,000 in savings.

Whether you’re in your 20s or close to retirement, having an emergency fund that can cover three to six months' worth of living expenses is essential. If you fall ill, become injured, lose your job, or fall victim to other emergencies, this money can help make sure you’re able to keep up with your bills.

5. Pay down high-interest debt

If you have high-interest credit card debt, personal loan debt, or a car loan that involves owing more than the vehicle is worth, consider paying it down with your inheritance. Paying off high-interest debt can save you a lot of money on interest payments in the long run.

6. Donate to charity

If you’re already in a financially sound position or simply want to give back, consider donating your inheritance to charity. By doing so, you can claim a number of charitable tax credits on your income tax return.

WHAT'S THE BEST WAY TO HANDLE AN INHERITANCE?

Ideally, the best way to use your inheritance is to put it in an investment vehicle so it can continue to grow. However, if you have high-interest debt or a dwindling emergency fund, it’s best to take care of these items first.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.