Following the death of his ex-partner, Jean-Claude* has just inherited a task for which he was not prepared. He becomes manager of his children’s inheritance.
The situation
Jean-Claude wants to do things well for his three grieving children. Thomas*, William* and Léa* lost their mother who succumbed to a long illness last year.
However, before leaving, Suzanne* made a notarized will with clear instructions. As she was single, her children inherited all her assets.
Jean-Claude writes to us for advice.
After selling the house, paying the tax on the mandatory disbursement of registered retirement savings plans (RRSP) and a tax-free sum from insurance, Jean-Claude estimates that the inheritance amounts to $750,000 .
“According to the wishes of the deceased mother, from the age of 25, the amount will be gradually returned to the children over a period of 10 years,” writes Jean-Claude.
For the moment, the children don’t have any big plans. Léa, 15, is in secondary school, William, 21, has not yet finished his university studies while Thomas, 25, has just started his career.
“What is the way to manage this money wisely while still having an acceptable return? “, he asks himself.
Currently, no assets are fixed, everything is 100% in cash, specifies Jean-Claude.
“Is it possible to make one or two plans to manage this inheritance optimally? »
Numbers
Legacy
House: $350,000
Insurance: $200,000
RRSP after taxes: $200,000
Annual salary
Thomas*: $55,000
William*: $15,000
Léa*: $3000
Analysis
Antoine Chaume Legault, financial planner and wealth management advisor at Assante Capital Management, Major Team, took charge of the matter.
“It’s obviously a catastrophe to lose your mother at that age,” he maintains. On the other hand, it’s a huge privilege to start life with so much money, and it comes with responsibility. »
“We often have this conversation with children of entrepreneurs who are going to inherit a lot of money,” says the planner. This is not a prank. It really takes supervision,” he insists.
PHOTO CHARLES WILLIAM PELLETIER, SPECIAL COLLABORATION
Antoine Chaume Legault, financial planner and wealth management advisor at Assante Capital Management, Major Team
Whether children have interest or not, we must help them take an interest in their finances, says Antoine Chaume Legault. His first advice is to empower the heirs and train them, with the help of the father or professionals.
For these young people, the danger is to fall into excessive and ephemeral consumer spending, such as buying a large car, underlines the expert. “It is essential that money is allocated to assets that appreciate in value over the long term. »
Tax-advantaged regimes
Second advice: Jean-Claude must check whether children can benefit from tax-advantaged plans before the age of 25.
The mother mapped the receipt of money from the age of 25 and over a period of 10 years, relates Antoine Chaume Legault. On the other hand, for the two children who are already 18 years old, the tax-free savings account (TFSA) is interesting, as is the tax-free savings account for the purchase of a first property ( CELIAPP) if they plan to buy a property.
If this is not possible, children should know that from the age of 25e birthday, they will be able to start using tax-advantaged tools: TFSA, CELIAPP and RRSP.
Jean-Claude must also check if the will provides that he can contribute money into a registered education savings plan (RESP) for Léa, who is 15 years old.
However, the planner warns Jean-Claude. If the money is placed in the TFSA, RRSP or CELIAPP in the name of the children, it will then be given to the children before the age of 25. “They will theoretically be able to do whatever they want with the money. Hence the importance of children being supported to establish a long-term vision. »
Currently, the money is in an estate account. The liquidator and manager of the estate, the father of the children, will carry out prolonged management of the estate.
The importance of 36 months
During the 36 months following death, the estate benefits from a progressive tax rate, without however being entitled to the basic exemption for individuals. All income generated by investments will be taxed as an individual would be.
After these 36 months, however, the estate will be taxed at the highest marginal rate of 53.32%.
You must then be fiscally strategic, and consulting a tax accountant will be a good investment.
The planner’s third tip is therefore to ensure that the income from the estate is allocated to the beneficiaries. “When children are young, studying and working little, they pay little or no tax. It’s an interesting tool. »
“If the youngest child cannot receive their money before the age of 25, we will have to study the allocation process. Because if we just leave the money in the trust, the income will fall at the highest marginal rate and that’s not beneficial at all. »
There is a rule that allows income to be attributed to children in the tax return without depositing the money into their accounts, explains the planner.
Use the services of professionals
Next comes the fourth tip for determining how to invest that money.
“The father and children must meet three different firms with stock brokers, who are attached to banks or who are independent. The family can then listen to the options offered. »
“With the assets that the children have, the father will have access to the largest firms and to people qualified to manage such sums. »
Someone who is not used to managing such a sum could fall into the trap of guaranteed products, argues the planner, because the Guaranteed investment certificates (GICs) are safe and that’s what he knows.
The independent firm or one attached to a bank will be able to draw up a capital deployment plan and offer, for example, capital protected notes.
“It is a product whose capital is partially or completely protected,” explains the expert. Yes, the money is blocked for a specific period. But you can get much higher rates than GICs, which are currently 5% for one year and around 4% for five years. Principal protected notes can generate 8% to 12% annual return. »
The children’s portfolio should be well diversified and balanced with mutual funds or exchange traded funds (ETFs). “There could be stocks of large companies, which generate profits and pay dividends. »
“The bond portion of the funds is currently benefiting from high interest rates. When rates start to fall, the bond portion risks also benefiting from the drop in interest rates. It is likely to perform well in the coming years. »
Fifth tip: in addition to stock market assets, the family could opt for a different avenue by purchasing real estate.
“It’s a long-term investment,” says Antoine Chaume Legault. The children could buy a triplex and each have their own place. They could also buy an income property. »
“Becoming a joint owner of real estate can be a good idea if, of course, all three get along well. »
* Although the case highlighted in this section is real, the first names used are fictitious.