What to do if your child receives an inheritance

One of the lasting gifts grandparents can leave their grandchildren is an inheritanceInheritance Property, money, titles, or debts that pass to you after someone’s death.+ read full definition. If used wisely, this bequest can have a significant impact on their future. Big dreams – such as a post-secondary education – can suddenly seem closer. Here are some key considerations for planning to get the most from an inheritance.

Take care of the taxes

In Canada, beneficiaries do not pay a “death taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition” or “inheritance tax” on funds they receive from an inheritance. But, there are still taxes. Certain investments of the estateEstate The total sum of money and property you leave behind when you die.+ read full definition are essentially considered ‘cashed out’ and the fair market valueMarket value The value of an investment on the statement date. The market value tells you what your investment is worth as at a certain date. Example: If you had 100 units and the price was $2 on the statement date, their market value would be $200.+ read full definition is noted as income (a capital gainCapital gain The money you make when you sell an investment or some other asset for more than you paid for it.+ read full definition) on your loved one’s final tax statement. That income is taxed and paid by the estate. What remains after taxes can be distributed to beneficiaries by the executor.

Consult a tax professional

Use a tax professional to prepare the last income taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition return for your late loved one; an expert can uncover substantial tax savings that could add to an inheritance.

Save for long-term goals

What do you want for your child’s future? Set some long-term goals, such as planning for their post-secondary education. If you are the parent, use these long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition goals as the starting point for what you will investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition your child’s inheritance in. That will help you figure out which investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition choices make the most sense for reaching your goals.

Start small and save big

Even small amounts of money saved for your child or grandchild can grow over time. Use this compound interest calculator to see how your savings can grow.

Know your risk, comfort and time limits

It may be tempting to invest your child’s inheritance in high-risk investments for long-term growth. Before you take action, make sure your plan matches your goals. Figure out what the money is for, how much time there is before your child needs it, and what you feel comfortable investing in. Does your inheritance have sentimental significance? You may want to take less risk to protect the inheritance, or perhaps even invest the money in things that your loved one would have supported.

Change your investment style over time

If your child is young, you may be able to take on more risk to take advantage of the potential gains over a longer time horizon. However, as you approach the time when the money is needed, you may want to reduce the level of risk to minimize the chances of financial loss.

Maximize your child’s savings and investment potential

Investing your child’s inheritance inside a Registered Education Savings Plan (RESP) accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition can be rewarding. The Government of Canada will match annual RESPRESP See Registered Education Savings Plan.+ read full definition contributions by 20% or up to $500 under the Canada Education Savings Grant (CESG) program. Additional grants may be made, depending on your family income. Opening a tax-free savings account (TFSA) – either in your name or in your child’s name if he/she is 18 or older – can also increase your child’s future resources with tax-freeTax-free Money that you do not pay tax on.+ read full definition investment growth. You can take out TFSATFSA See Tax-Free Savings Account.+ read full definition funds tax-free in the future to pay for special expenses (e.g., for summer camp or supporting development of a special talent).

Start teaching your kids smart money habits now

Now is the time to instill good money habits and a respect for what it took your loved one to earn and build that inheritance. Include your children in conversations about money and show them how you manage your finances – they observe and model your behaviour. Check out Make It Count that you and your kids or teens can experience together that can better prepare them for the privilege and responsibility of receiving an inheritance.

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