When I was in university, my grandmother’s brother passed away. He’d never married or had kids so in his will he left his estate – which included some shares in Maple Leaf Gardens he’d earned from working on the construction crew that built the iconic structure – to his sister’s grandchildren. This unexpected windfall that my cousins and I shared helped pay for my final year’s tuition and for a trip out to B.C., just before the school year started.
It’s a nice story (particularly for me), but one that’s less likely to play out today. The ongoing global economic malaise means that many older Canadians are worried about being able to provide for themselves in their retirement years, let alone have anything left over to leave their offspring. Here are a few reasons why you shouldn’t count on an inheritance nest egg, and some options to help ensure that mom and dad are able to leave something behind.
We’re Living Longer
Advancements in health care mean that people are living longer than ever. According to a 2011 Stats Canada report, seniors accounted for a record high of 14.8 percent of the population - an increase of more than one per cent over the previous five years. Over that same time frame, the number of Canadian centenarians jumped more than 25%, with 5,825 people 100-years or older shuffling around.
But as we age, we often face health-related costs – medicines and treatments not covered by provincial health plans, the expense of retrofitting homes with ramps, elevators, and other assistance devices, or the cost of moving into an assisted care retirement home - all of which can eat into (and potential eat up) any inheritance funds.
Our Assets Have Shrunk
In June, RBC Wealth Management and Capgemini released their annual World Wealth Report. While all the recent headlines have been about economic calamity in Europe, North Americans haven’t escaped unscathed, with our collective wealth declining by 2.3% in 2011. There were also 38,000 less “ultra high-net worth individuals” (i.e. people with more than $1 million available to invest) in North America than there were in 2010.
Granted, most of us aren’t children of HNWIs, a Globe and Mail story based in part on the report surveyed Canadian financial advisors and found that many people’s investments had shrunk by as much as 25%.
A Taxing Situation
Whatever wealth does remain in your parents’ estate may be subject to various taxes, with Capital Gains Tax looming largest of all. If you’re lucky enough to have parents who own a cottage, you need to be aware that whether they pass away or pass it on to you prior to death, someone will be on the hook for capital gains tax. Here’s an abbreviated version of how it works:
Say your parents bought the cottage for $50,000. Today’s it’s worth $350,000. Fifty percent of the increased property value (50 percent of $300,000 equals $150,000) will be added to someone’s – mom’s, dad’s, or their kids' – income for the year the property has been “disposed” (i.e. either sold or passed on to an heir), and taxed at the country’s top annual tax rate of 29%. So, not including your other income, if you were your parents’ sole heir, you could end up with a nice cottage, and a $43,500 tax bill ($150,000 times 29%).
While you can’t avoid it, there are ways to lessen the burden, or at least prepare for it. If the increased value of the cottage surpasses that of the family home, for example, you can pay the Capital Gains Tax on the house instead.
Peter Lillico, an estate-planning lawyer based in Peterborough, Ont., has seen far too many families lose their treasured assets to insurmountable tax bills. One of his recommended options is to set up a life insurance plan that will cover any capital gains costs. (Kids: don’t get any nefarious ideas…)
Lillico also has countless tales of inheritances squandered on lawyers’ fees (and he’s a lawyer), because families didn’t discuss their interests and intentions prior to their death. He strongly advocates that parents must speak with their children to find out what they want (one child may have no interest in the family cottage and would rather get a lump sum of cash in lieu of it), and write up a legally binding will that all parties are aware of.
While you really shouldn’t be looking at your elderly parents as a nest egg waiting to fall in your lap, the moral of this particular story is this; don’t count your chickens before they’re hatched.