Peter Boys, CAFA
Financial Coach
Canada’s legion of baby boomers have seen their retirement portfolios decimated with the stock market meltdown. A recent survey found that many are wrong in thinking their expected inheritances from parents have not suffered the same fate.
About 25 per cent still expect that their inheritance will make up for any shortfall in their retirement savings plan as a result of the same stock market collapse. Many have overlooked some of the factors that could have had a very negative impact on what they are expecting to inherit. People are living longer these days, increasing the real risk of running out of money or suffering a serious illness that could rapidly deplete the funds available.
Taxes may be another real threat. Consider a retired couple with $350,000 in RRSPs. There is no tax problem if either spouse dies, but a big problem on the last death. All of the remaining RRSPs are considered as income in the year of the last death and the estate would have to come up with $136,500 to pay the tax owing. ($350,000 x 39 per cent, which is the top marginal rate in Alberta). Adding to this is probate, executor, trustee and legal fees. (Probate is not a big expense in Alberta, but can take a long time to work through).
A cottage owned by parents can create another nasty tax trap as capital gains can rear its ugly head on the demise of the parents, and would trigger a deemed disposition in CRA’s (Canada Revenue Agency) eyes. Consider a lake front cottage purchased in the 1960’s for $30,000 and now worth $500,000, then deduct any improvement costs, say $50,000 and the capital gain would be $420,000. At the 50% inclusion rate, would trigger $210,000 of taxable gain, so $81,900 of tax owing to CRA if the kids want to keep the family cottage.
The same survey suggests that very few of the parties involved will do anything to resolve these issues. Over 50 per cent of parents and children have no plans to talk to a financial advisor, as how to address the risks involved with leaving an inheritance. Adding to this, the majority indicated they had not contacted a financial advisor about what to do with their inheritance.
Adequate advance planning and open communication between the generations could resolve most of these issues and ensure both parents and children have a better chance of financial security. If your current financial advisor is more focused on selling you than educating you about the pitfalls of not planning your estate needs, I suggest you find someone else to work with.