Hey there, time traveller!
This article was published 24/3/2012 (1979 days ago), so information in it may no longer be current.
You could be receiving your share of $1 trillion in the coming decades.
And no, that's not a financial grifter's online come-on you might find in your email inbox.
It's a finding of a recent study by Investors Group about what many Canadians soon stand to inherit.
The giant Winnipeg-headquartered mutual-fund dealer estimates $1 trillion in wealth will be transferred from one generation to the next in Canada during the next 20 years.
More than half of Canadians expect to receive some kind of inheritance, the study found. And more than half of those who stated they know the size of the inheritance expect to receive more than $100,000.
While the study is full of percentages that make you go "hmm," maybe the most interesting figure is Canadians' expectations of receiving an inheritance decrease to less than 50 per cent as they age. That could partly be attributed to another figure the Investors research uncovered. Of those age 60 and older, 45 per cent are concerned about financing their retirement and leaving something behind for the next generation.
Call it the X factor, says Christine Van Cauwenberghe, director of tax and estate planning at Investors Group.
"Retirement is largely an unknown for a lot of people," she says.
Sure, there are the goals and dreams: snowbirding, golfing and hanging with the grandkids.
But the realities of retirement -- sickness, falling interest rates and stock prices and inflation -- can throw a big wrinkle into those plans.
"As people get older, they become more realistic in their expectations," she says. "That's because they have a better handle on what the real costs are of living through retirement."
They've also likely done some estate planning and become familiar with the "deemed disposition at death" taxation scenario.
"People are often surprised about how taxes can erode the value of the estate," says Caroline Kiva, a lawyer with local firm Pitblado Law.
"In certain circumstances, there are rollovers available, such as if the assets are passed to a spouse, but if it's going from a surviving parent to children, there are taxes that have to be paid."
Once the surviving spouse dies in Manitoba, the Canada Revenue Agency deems all owned assets sold. The result is the RRSP, the non-registered investments, real estate and other potentially taxable assets form a final farewell tax bill that likely has to be paid from the estate's assets before it can be passed on to the next generation.
The larger the estate, the greater the tax liability might be.
Often, the real shocker for people is the Registered Retirement Savings Plan or Registered Retirement Income Fund, frequently mistakenly considered non-taxable accounts.
"They look at the RRSP or RRIF number and then they realize it's really half of that amount they see because the account is deregistered upon death and becomes taxable income, often pushing the deceased into the top tax bracket," says Kiva, who practises estate law.
In Manitoba, the top marginal rate is 46.4 per cent.
Once taxes are paid from the estate, however, the beneficiaries do not pay taxes on what they receive.
But they do often pay taxes on income earned from investing the money. For that reason, some people create a testamentary trust as part of the estate plan, she says.
Assets from the estate are transferred -- after tax -- into the trust. Future earnings within the trust are taxed as if the trust was a taxpayer. The benefit here is the income generated within the trust is taxed at a lower rate than if it is earned in the hands of the beneficiaries, who might earn a lot of other income.
Trusts are also set up in circumstances where the benefactors -- the deceased parents -- worry about the beneficiaries' ability to handle a substantial sum of money, Kiva says.
This often is a consideration for parents with adult children with special needs or addictions.
Yet even for the most competent individuals, receiving a substantial inheritance can be difficult to manage, says Toronto-based financial planner Sandra Foster. Simply put, more money entails more complicated planning.
"You need to think about what your personal goals are for a significant amount of money," says Foster, author of You Can't Take It With You: The Common-Sense Estate Planning Guide for Canadians.
"Is it to get out of debt? Is it for education, retirement, today's lifestyle or charity?"
One important and often awkward consideration is the state of a marriage or common-law relationship. In Manitoba, inheritances are legally protected in the event of separation and divorce.
"But if the child comingles those dollars they receive as an inheritance in a joint account with his or her partner, those assets would be sharable," Kiva says.
Undoubtedly, this can lead to emotionally charged discussions while planning an estate or after the inheritance has been doled out.
Inheritances carry a lot of psychological weight regardless of the situation, says Winnipeg-based psychologist Moira Somers.
"It's an emotional event no matter what," says the therapist, who specializes in financial issues.
"But as you start dealing with larger amounts, the emotional intensity gets cranked up."
Foster says settling an estate often can take months or years, depending on the amount of assets and whether it is contested. But a little time to catch your breath -- as long as it's not a span of several months or years -- isn't a bad thing.
"It gives you time until you can make peace with everything as much as you can," Foster says. "But sooner or later, you're going to have to make some decision in terms of what you want to do with the money."
Ideally, an inheritance is a wonderful way for a family member to leave a legacy that enhances the lives of those left behind, Somers says.
Inheritors often want to make sure the money is used in a way that lives up to the legacy, including donating to charities, paying for their children's education or providing financial stability to their lives.
There are perils related to a windfall, too.
"The risk is that people can go back to their earlier financial set point," Somers says. "If that set point was chaotic, with lots of debt, then more money may not change anything."
Other problems arise when siblings perceive they have been treated unfairly in the will.
It's often stated that fair does not always mean an equal share in the assets in wills. Parents occasionally leave more to one child who may not be as financially well-off, for example. In this instance, the parents should discuss their intentions with all members involved in advance.
Otherwise, long-standing family fault lines can lead a prolonged internecine squabble.
"When that earthquake comes, do you ever see those tectonic plates shifting," Somers says.
It's that kind of nasty family feud most people aim to avoid when they plan their estate, Kiva says.
"You hear all kinds of horror stories about children arguing about what they've received," she says. "If people are really concerned about reducing family friction, then they will do their best to plan ahead of time."
A trillion? Really?
The $1-trillion wealth transfer over the next two decades estimated in a recent Investors Group study is a familiar figure, says Sandra Foster, estate planning expert with Headspring Consulting. "In 1997, I remember talking about how $1 trillion was going to be inherited over the next 20 years." While the number may seem massive, many Canadians will likely receive less inheritance than the number would indicate because the costs associated with late-stage retirement are increasing, she says. Benefactors are living longer and requiring costly assisted-living care accommodations or enhanced home care. Furthermore, the stock market has flatlined for the last decade and interest rates are at historic lows, corroding retirees' savings.
Trillion-smillion... try $41 trillion
Canada's predicted transfer of wealth is a wafer-thin sliver of the forecast for the United States, says money therapist Moira Somers. "The projections are $41 trillion by 2052, 70 per cent of which is apparently going to end up in the hands of women."
Giving with a warm hand
Some people will gift their assets away before death to avoid taxes and probate fees, says lawyer Caroline Kiva, who practises estate law. "The saying, 'Give with a warm hand versus a cold hand' is fine. However, I think you need to really consider your circumstances," she says. "Are you going to need those dollars to pay for expenses to live?" Clients who have substantial assets to see them through retirement may choose this route, but that's largely because they want to see the recipients enjoy the windfall. Reducing estate taxes upon death are also a valid reason. But the avoidance of probate fees is often not. "A lot of people seem to be focused on probate planning, which is, quite frankly, nickel and diming," says Christine Van Cauwenberghe, an estate planning expert with Investors Group.
Probate fees no problem
Probate fees in Manitoba are relatively insignificant, Van Cauwenberghe says. The probate fee is $70 for assets up to $10,000. For every $1,000 above $10,000, the fee is 0.7 per cent. On a $100,000 estate, for example, the probate fees would be $700.
Gifting the family cabin
As with any investment that may have increased in value -- a capital gain -- a cabin will have a deemed disposition even if it is gifted from one generation to the next. That means it's considered sold at fair market value and any capital gains, minus the adjusted cost base (maintenance, for example), are taxable. "A lot of people will think, 'OK, if I give a cottage to a child in advance and charge him $1,' that they'll somehow minimize the tax," Kiva says. But if that cabin is worth $300,000 and was purchased 10 years ago for $100,000, the Canada Revenue Agency will be waiting for its share of that $200,000 gain regardless of the $1 sale price.
The final tally
When someone dies, they have a deemed disposition of assets. When the estate passes to a spouse or partner, the deemed disposition is deferred until the remaining spouse or partner dies. When the last spouse dies, the non-registered investments are considered sold, potentially resulting in taxable capital gains. Their registered (RRIF and RRSP) assets are deregistered and fully taxable. A $200,000 RRIF, for example, gets tacked on as income in the final tax return, and it's taxed at the deceased's marginal rate.
-- RBC Wealth Management