PETER DOLEZAL: Getting an inheritance? Manage it responsibly

Paying off high-interest debt best first use of money

With our aging demographic, thousands of baby boomers are reaching age 65 every month.

Many boomers – and their children – will be participants in the greatest transfer of wealth, through inheritances, ever seen in Canada.

Inheritances, often in the hundreds of thousands of tax-free dollars are not unlike the experience of winning a lottery.

Some recipients handle the experience well – others very poorly, eventually ending up with little in the way of long-term benefit for the family.

Following a few basic principles can make the experience less stressful, and lead to lasting benefits.

Upon receiving an inheritance, it’s reasonable to set aside a small portion to take a long-anticipated family holiday, upgrade an aging vehicle, or enjoy some other modest indulgence.

However, the majority of the funds must be allocated very carefully, for the greatest advantage.

As with any windfall, whether a successful asset sale, a lottery, or an inheritance, the first and best utilization of the new-found funds is to pay off debts. This locks in a tax-free gain by eliminating interest costs. Even at four per cent, a mortgage may cost hundreds of thousands in interest payments over its 25-year amortization.

And remember, every interest payment is made with after-tax dollars. If the inheritance is not large enough to pay off all debts, the loans with the highest rate of interest should receive priority.

All debts are paid off, but significant funds still remain? Topping off RRSPs and TFSAs to take full advantage of unused contribution room is the next logical application of funds.

After that, excess funds, along with the tax refunds from RRSP contributions, can be used to top up RESPs for children and grandchildren, for home renovations, or other forms of assistance to family members.

Once these strategies have been implemented, those who receive significant inheritances may still have funds available for long-term investment in non-registered investment accounts.

Deployed in low-cost, well-diversified investments such as exchange-traded funds or index funds, the dream of an earlier, financially stress-free retirement will become a greater reality.

If handled wisely, an inheritance can become a life-changing opportunity for the recipient and his family.

If handled poorly, it may provide major short-term gratification, but produce little lasting benefit and perhaps, major regret after it is all gone.

A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, The Smart Canadian Wealth-Builder, is now available at Tanner’s Books, and in other bookstores.

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