Asking your parents and grandparents what your inheritance will look like once they pass away is undoubtedly a sensitive topic. Nevertheless, it's important to know if you can rely on an inheritance as part of your financial plan. For millennials -- those born between the early 1980s and the early 2000s -- this question presents its own unique challenges.
A study published by Decima Research in 2006 predicted an unprecedented $1-trillion wealth transfer when the baby boomers pass away. But some industry experts are questioning this number, including Doce Tomic, president and CEO of Credential Financial.
"The wealth transfer will not be that large because baby boomers are living longer and spending for longer, so wealth erosion is inevitable," Tomic says. He adds that the potential liability of longer-term medical and home care expenses is under-estimated in the $1 trillion assessment.
"Another reason that inheritance may be less is because baby boomers don't have the same attitude toward debt as the generation before them that lived through the depression era," says Tomic. As a group baby boomers haven't seen as many spikes in inflation or interest rates during their working years, so they don't necessarily view debt as bad. Over the past 30 years, they have generally had access to low interest rates in order to help control their debt. Therefore they are more likely to pass on debt to their heirs.
As well, Tomic says baby boomers haven't been willing to give up their lifestyle as they enter their retirement years. Unlike previous generations who sacrificed everything for their families, today's baby boomers want to help their children but they also want to take vacations and enjoy the fruits of their own labour.
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| Doce Tomic | |
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Moreover, other factors come into play that make it challenging to rely on inheritance. For example, parents and grandparents may keep their finances private; if your inheritance is a secret, it's next to impossible to follow a financial plan based on probability.
And there's always the possibility that you'll receive nothing. Maybe your family members plan on leaving all of their assets to charity, or they may decide to spend all of their savings during retirement.
Adam Soares, financial advisor at Assante Capital Management, says another factor that can erode inheritance is probate. "If a family member dies without a will, the estate is turned over to the legal system and there are significant fees involved in this process."
From there inheritance can be stuck in limbo for years because the courts have to appoint an executor who then eventually decides how to distribute the assets. "I've seen this situation firsthand and it's an absolute nightmare. Not only is it costly, it causes a tremendous amount of heartache and headache for the family."
Lastly, inheritance occasionally comes with restrictions. For example, a family member may leave $100,000, but it has to be paid out in increments of $10,000 every four years. So, your plan of investing a lump sum goes down the drain. And there can be additional restrictions based on behaviour. Maybe your grandparents hate your smoking habit and have included a stipulation that says you'll only receive money once you stop smoking.
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| Adam Soares | |
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As you plan for the future you don't want to be one of the many Canadians who overshoot their inheritance and end up in financial difficulty. According to the same Decima study quoted above, 1.5 million Canadians were relying on their inheritance as the primary source of capital to fund their retirement. The report stated that, on average, Canadians expected to receive a total of $150,600 in cash or cash equivalents, and $151,200 in non-cash inheritance. But in reality, inheritance sums received were significantly less; the average inheritance received that year was $56,000.
Overall, there are too many uncertainties for millennials to comfortably rely on inheritance as part of their financial plan.
Tomic says Generation Y "should not depend on inheritance. They should view it as something nice or extra that may happen, not something final."
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