Inheritance Planning

Receiving an inheritance, especially an unexpected one, might leave you feeling a little overwhelmed by the options. Ideally, the money should bring you closer to financial independence, but many heirs don’t know how to handle a windfall and end up no better off than they were before. The first mistake people make is they spend the money on themselves. The second mistake is that they may choose bad investments because they consider the inheritance to be found money and take on too much risk. Its fine to have a little fun by spending a little on discretionary purchases but the first priority should be to develop a strategy.

Northern River Financial starts with an inventory of your financial life by taking a close look to determine if you have adequate insurance, are carrying too much high-interest debt, are on track for retirement and have an emergency fund. It is important  to make sure your foundations are in place. Everyone’s financial life game plan will look different depending on age, level of debt, whether they are supporting children or parents, and how they want to live in retirement. The point is to gain financial stability in the pressing issues and put the remainder toward reaching your goals such as paying off high-interest debt, maximizing RRSP contributions, and supplementing your children’s RESPs.

Key Considerations

  • Take an inventory of your financial life
  • Develop and maximize your financial life plan
  • Determine your short term and long term money needs
  • Fund an emergency account and pay down outstanding debt
  • Increase your contributions to your RRSP and TFSA

It is important to take time and look into the numbers. Parking the windfall in a high-yield savings account or a balanced investment fund for a few months to sort out your priorities. Acting too hastily can lead to trouble. Paying off your mortgage without thinking about future income could leave you living debt-free but in poverty. For some debt, including mortgages, it is important to consider the interest rate and compare that to an expected investment return. Constructing a portfolio that generates passive income is the slow-and-steady approach that will lead to financial independence but it’s a step most people miss. A portfolio that provides a steady stream of income is a safer long-term strategy avoiding unnecessary risks.

Consulting with a financial life planner will help you develop a plan or maximize your current plan. If you know you’ll inherit, you can begin planning ahead of time, but if the inheritance comes as a surprise, a planner can provide a better idea of your options. Its important to get an objective opinion on your entire financial picture and a thorough understanding of your goals. Complicated assets, such as a family business or an asset you’ve inherited with others such as a home, will require professional planning. Though a financial life plan will help you keep and grow the assets you’ve inherited, it doesn’t have to be perfect or static. It can and should change over time.