Navigating a Windfall: How to Manage an Inheritance

Key takeaways:

  • Work with qualified professionals to make an inheritance financial plan today for an anticipated intergenerational wealth transfer so when the time comes you are prepared to make strategic decisions about your inheritance and increased net worth.
  • Don’t rush any decisions after experiencing a loss of a loved one. Take the time you need to grieve and get organized so you can make informed decisions.
  • Review the details of your inheritance with legal representation so you understand all of the tax implications for you and your loved one’s estate and leverage wealth preservation strategies.
  • Create your own wealth plan with a financial advisor that takes advantage of diversification, like incorporating private alternative investments, so that you’re also able to leave a financial legacy for your heirs.

When you imagine receiving a windfall of wealth, you might think of all the things you could do with it, like boosting your savings, paying down debt, buying a new home, or taking that dream vacation. But when the windfall comes as an inheritance, your feelings about it, and how to best manage that wealth, can be far more complicated.

Generational wealth is a financial foundation made up of assets, like property and investments, that those before you earned and grew to support their current lifestyle and to ensure the financial security of their family going forward. It’s part of a legacy of wealth that will help you and your descendants build your own financial future, and while receiving it can provide opportunities for you and your loved ones, it can be a difficult thing to manage when the time comes, both emotionally and logistically.

Having a plan for when you receive this wealth can turn a complex, overwhelming time into smoother sailing. Here are some steps you can take to help make managing the intergenerational transfer of wealth process simpler, while also positioning yourself to become the new, capable steward of that legacy.

1. Prepare for the wealth transfer

In an ideal world, you would have known that your loved one was intending to pass their wealth to you, giving everyone time to make and fully communicate a wealth disbursement plan. Knowing beforehand the status of the estate, the intentions behind its structure and asset allocation, and the roles you and other members of the family and advisory team are assuming during the execution of the estate can give you peace of mind and a clear path forward at a time where feelings and stress are at an all-time high. For example, if your inheritance was to include private alternative investments, like Skyline real estate investment trusts (REITs), your loved one would have had the chance to name you as the beneficiary of the investment in their will and directly on accounts that have a joint owner or tenant in common, or are held in registered accounts, to help ensure a seamless transition to your portfolio without potentially diminishing the value by a lengthy, expensive court-supervised probate process or having to prematurely cash out the investment. If you didn’t get the opportunity to establish a plan with your loved one, there’s no reason to panic—there will still be opportunities to make decisions that will honour their hard work and legacy.

2. Take time to grieve and get organized

The days and weeks directly after losing someone important to you isn’t the time to make any major financial decisions. Coping with your grief, handling arrangements, and dealing with the impact of the loss to your day-to-day life is stressful enough without adding significant decision-making or planning to it. Take the time to get your bearings and gather information that you need in order to make those decisions when you’re ready. For example, you may want to review your own financial situation a trusted, licensed professional before you begin the herculean task of reviewing your loved one’s estate and executing their wishes. Review your current debts, savings, investments, and future goals, and consider what you’d like to change or bolster in your own plan with the wealth you’re going to receive. Knowing where you stand can help facilitate the integration of your inheritance into your current finances, so you’re able to make the right decisions for the legacy you were left and your own financial future.

3. Review the details of your inheritance

The wealth your loved one built probably included a diverse portfolio of assets, including a variety of investments. And while there’s no formal inheritance tax in Canada to factor in, understanding what has been bequeathed to you, the way it’ll be handled during the execution of the estate, and the things you may need to consider when you incorporate it into your portfolio can help you make strategic decisions about how to use these assets to reach your wealth goals.

How do I deal with the registered accounts I inherited?

Savvy investors leverage the tax advantages of registered accounts, like Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), Locked-In Retirement Accounts (LIRAs), and Registered Retirement Income Funds (RRIFs), and Life Income Funds (LIFs), maximizing tax sheltering, deferrals, deductibles, and even tax-free earnings to meet their financial goals. As your loved one was growing their wealth, they most likely had registered accounts they used to maximize their earnings. Those accounts will now need to be managed as part of your loved one’s estate.

If registered accounts were part of the inheritance you received, there are different options and tax implications for you to consider depending on your relationship to your loved one. If you are your loved one’s spouse or common-law partner, you’ll generally have more tax protections and advantages than if you have a different relationship with your loved one, like if you’re their child or extended family. For example, if your spouse or common-law partner named you as a successor holder to their TFSA, you’re able to simply roll the investments held in the TFSA into your own TFSA without affecting your maximum annual contribution room or having to pay any taxes. If you’re the named beneficiary for your loved one’s TFSA, either on the account or in their will, but you’re not their spouse or common-law partner, the investments held in the TFSA can be transferred to you or they can be liquidated and you’ll receive a lump sum in cash for the fair market value (FMV) of the investments. In either case, you’ll only have to pay taxes on any earnings incurred from the date of death and you can only add the investments or lump sum to your own TFSA if you have the contribution room available.

How do I manage the investments in the non-registered accounts I have inherited?

When capital property, like non-registered accounts, is managed as part of an estate, there are tax implications and limitations to consider, which will depend on how you’re inheriting the property and your relationship to your loved one. For example, just like with registered accounts, spouses and common-law partners have special protections and rights with regard to these non-registered accounts.

Generally, you’ll have one of three designations that’ll give you different rights to non-registered investment accounts when you inherit them:

  1. Joint owner and right of survivorship
  2. Tenants in common
  3. Named beneficiary in a will

In any of the above three options, it’s important to take your time after taking stewardship of your loved one’s investments to review their value, how they will align with your financial goals, and the implications of liquidating them if you don’t want to keep them as part of your portfolio. Selling all investments immediately after inheriting them could lead to higher taxation for yourself and a devaluation of the investment, particularly those investments that are built for the long-term.

For example, if you inherited a Skyline product via a non-registered account from your loved one, maintaining the investment would allow you to keep taking advantage of an investment with historically consistent returns, potentially helping to provide your portfolio with stability in the face of market volatility. And, depending on your cash flow needs, you could take the regular cash distributions offered by Skyline REITs—namely Skyline Apartment REIT, Skyline Industrial REIT, and Skyline Retail REIT—or you could enroll in the Distribution Reinvestment Plan (DRIP) offered on all Skyline REITs to reinvest those earnings to harness the power of compounding and grow your wealth even faster. This compounding effect is also available when investing in Skyline Clean Energy Fund, as any earnings are automatically reinvested back into the Fund, providing regular unit value increases and maximizing potential growth. Speak to the financial advisors and relationship managers of the assets that your loved one depended on to help determine the most strategic path forward for you.

4. Create your own wealth plan

Once you have a fulsome understanding of what you have inherited and how your loved one structured their wealth, you can work with a licensed professional to help decide how you want to incorporate it into your own financial plan. Unlike a windfall that could come from a lottery win or professional success, when you inherit intergenerational wealth, you’re not just receiving a boost in your own net worth; you’re also receiving a legacy of hard work, strategic investment decisions, and long-term planning. And by becoming the steward of that wealth, you’re taking on the mantle of honouring their past and protecting it for the future. This can include maintaining investments and assets because of the values they represent and the goals your loved one set for themselves and beneficiaries like you. It can also mean taking cash payouts and investing them to keep them growing in your own portfolio, so when the time comes, you can also pass along a legacy to your heirs.

Regardless of how you decide to maintain the assets you have been given, using your inherited wealth to establish a diverse portfolio of investments for yourself can help you take full advantage of the opportunity your loved one has given you. As you’re establishing your own wealth, consider including a blend of registered and non-registered accounts, plus different types of investments, like private alternatives, so as you grow your newfound wealth you’ll be maximizing your potential earning capacity with tax efficiencies. For example, including private alternatives like Skyline REITs can help you build your long-term investment plan, as they’re anchored in real, tangible assets that are linked to essentials Canadians use every day—housing, logistics, essential retail, and electricity. You may also be able to leverage tax advantages that aren’t available via earnings received as interest or dividends. Specifically, Skyline REIT distributions are paid out as either tax-efficient capital gains or Return of Capital (RoC), or taxable income, or a combination of all three. When you receive capital gains distributions, you will only have to pay tax on 50% of the amount, and when you receive RoC distributions, they aren’t considered income and therefore aren’t taxed in the year you receive them. Just remember that RoC distributions will affect your Adjusted Cost Base (ACB), so make sure to track this carefully to avoid additional penalties and taxation.

Next steps for managing your inheritance in Canada

Managing an inheritance you have been bequeathed is a vital part of protecting your intergenerational wealth legacy. Your loved ones have worked hard to create financial security for you and those who will come after you, and now it’s your responsibility to maintain this wealth. Taking on the role of steward of your family’s wealth is a complicated process that can feel overwhelming if you’re not prepared. Follow these four steps so you know what to do with your inheritance money in Canada:

  1. Work with a financial planner to prepare an inheritance financial plan for an anticipated wealth transfer, including talking about the strategy and vision behind the decisions that have already been made with your loved one.
  2. Take the time you need after your loss to grieve, get your bearings, and review your own financial situation, so you can make decisions clearly, with all of the information you need.
  3. Understand what you’re inheriting, including any tax implications to the estate or to you, as the new owner of the assets. Speak to the advisors and relationship managers that assisted your loved one with the management of their assets about wealth preservation strategies, and work with your own financial advisors about how to proceed.
  4. Create your own wealth plan that will incorporate your new net worth and put it to work so you can benefit from it now and into the long-term, establishing your own intergenerational legacy to pass along.

As you navigate these unchartered waters of your new wealth, remember that your loved one chose you to protect and carry on their hard work, trusting that you’re more than capable to helm this next chapter. Take comfort in that thought as you build your own financial future and keep your eye on the prize: a continuing legacy for generations to come.

Inheritance is a legacy, passed down.
Find out how Skyline can help you maximize your new wealth

Inheriting wealth FAQs

How can heirs invest in private alternatives?

As an heir, you can invest in private alternatives by using the wealth from your inheritance to build a more diversified portfolio that continues to grow over time. Private alternative investments are assets that sit outside public exchanges and beyond traditional stocks, bonds, or cash. They can include private equity, hedge funds, commodities, and real estate, and are generally designed to generate income, long‑term capital appreciation, or both. By allocating a portion of inherited wealth into these opportunities, such as Skyline real estate investment trusts (REITs), or Skyline Clean Energy Fund, heirs can access investments that can offer stability, tax‑efficient income, and growth potential not typically available through public markets. Reinvesting distributions or directing inherited income into private alternatives can help keep your new wealth working, while helping to support long‑term financial security for future generations.

What is probate and how much does probate cost?

Probate is a provincial-court-supervised process used to validate the will of someone who has passed away and confirm the legal authority of the named executor(s) to manage and distribute the estate. The probate process isn’t always necessary; it’s usually triggered if there are assets owned solely by the deceased, if there are assets worth a significant amount that are only in the deceased’s name, or if there are disputes about the will itself or the beneficiaries named in the will or to the assets directly. Generally, probate processes are expensive and time consuming, so taking the time to create an estate plan can prevent having your loved ones having to participate in one after you pass away.

You can potentially avoid a complex, costly probate process if:

  • assets have named beneficiaries, either directly or via the will;
  • assets are co-owned by a named beneficiary;
  • assets were given before the death; or
  • trusts are being used to hold assets.

The details of how a probate process will work and how much it’ll cost, which is generally based on a percentage of what the estate is worth, depend on the province or territory where the deceased lived.

What does dying intestate mean?

Dying intestate means that someone has passed away without a will. In this case, a provincial-court-supervised probate process will be established to manage the disbursement of assets, like their home, business, bank accounts, personal assets like art or heirlooms, insurance policies, investments, and registered accounts, and management of the estate. Essentially, assets will either flow into an estate to be managed by the probate process or go to any named beneficiaries of the assets. In either case, the estate will be disbursed based on the unique rules set by the province or territory the deceased lived in and will be subject to any applicable penalties, taxes, and fees.

What happens to registered accounts when the account holder dies?

When a registered account holder passes away, depending on whether or not a beneficiary was named to the account and the relationship of that beneficiary to the deceased, the registered account and the investments within it will either be transferred to the beneficiary or be liquidated and the funds will be disbursed as part of the deceased’s estate.

If a spouse or common-law partner is named on the deceased’s accounts, the surviving spouse or common-law partner can either assume the inherited registered accounts outright or can roll them into their own registered accounts without incurring any penalties.

If there’s a named beneficiary on the registered account and they’re not the deceased’s spouse or common-law partner, the beneficiary can either take over the ownership of the investments held in the registered accounts or those investments will be liquidated and they’ll receive a lump sum equal to the fair market value (FMV) of the investments.

It’s important to note, regardless of the situation, that each registered account and how it is handled when the original account-owner passes away is unique, so be sure to visit the Government of Canada site for account-specific information, or contact a licensed financial advisor for advice tailored to your circumstances.

What is a deemed disposition?

A deemed disposition is a tax rule in Canada where the owner of property has been considered to sell it at fair market value (FMV), even if no actual sale occurred. Deemed dispositions can trigger capital gains or losses, which will then inform how much tax the owner will have to pay due to the “sale” of their property. Deemed dispositions are commonly applied when someone has died, emigrated from Canada, or when the property’s use is being changed (e.g. a principal residence has become a rental).

What is a joint owner and right of survivorship?

Joint owner and right of survivorship are designations for the owners of a non-registered investment account. If the joint owners are spouses or common-law partners and one of the joint owners passes away, the surviving spouse or common-law can take over ownership of the account on a tax-deferred basis, meaning no tax will need to be immediately paid by either yourself or the estate when it’s transitioned to you.

If the joint owners have a different relationship, like parent and child, and one of the joint owners passes away, the surviving owner will be able to take immediate ownership over the account, however, a deemed disposition will be applied to the deceased’s interest in the investments for the FMV at the time immediately prior to the death for income tax purposes. Any capital gains or losses from that deemed disposition will need to be handled by the estate.

Regardless of the relationship the survivor joint owner had to the deceased, the account won’t have to go through the estate, which means it also won’t be subject to any probate process or any resulting probate fees.

What are tenants in common?

Like joint ownership, tenants in common means multiple people own a stake in an asset, like a non-registered investment account, and those stakes can be unequal. Unlike in a joint ownership, though, there’s no right of survivorship, which means when one of the tenants in common passes away, their interest in the investment needs to be liquidated and put through the estate to go to the beneficiary named in their will. If the other tenant in common is the beneficiary for that portion of the asset, they will receive a lump sum amount, after any applicable taxes and probate fees, from the estate of the deceased. If the other tenant in common isn’t a named beneficiary to the deceased’s portion of the investment, they won’t receive any of the proceeds. In both cases, the surviving tenant in common’s portion of the asset will remain intact with no additional tax or process implications.

What is a named beneficiary to a non-registered account?

A named beneficiary to a non-registered account is the person who the asset will go to when the owner passes away. Beneficiaries cannot be named directly to a non-registered investment account, but they can be named in the deceased’s will. If the named beneficiary in the will isn’t a joint owner or tenant in common, then the investments held in the non-registered account will be deemed to be disposed of at fair market value (FMV) and any taxes and fees incurred from that process will have to paid by the deceased’s estate. The named beneficiary will become the owner of the investment account and will be responsible for any applicable fees and taxes on earnings that were incurred from the time of the deceased’s passing. While being named the beneficiary of a non-registered account doesn’t prevent any tax implications for the estate, it can prevent the account from having to pass through the estate and any costly probate process that applies.

 

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