Personal Finance

Locked: Inheritance! Any tips?

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  • Feb 28th, 2018 3:39 pm
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[OP]
Banned
Feb 20, 2018
3 posts
4 upvotes

Inheritance! Any tips?

Using a throwaway account (don't want to tie this in any way to my main RFD ID) for privacy/security reasons.

I just received a significant inheritance: $850,000. While certainly not enough money to retire to a life of luxury and leisure, it is enough to make some major changes for my family. My wife and I have had many challenges over the years, including a consumer proposal about 10 years ago, but we've come out the other side and we are currently doing "okay." This money will certainly set us up for the future, but I want to make sure we use it in the best way.

Our current situation
  • I earn about $125,000 annually. My wife hasn't worked in almost a year, on doctor's orders (stress). She was, previously, earning about $50,000. I suspect this windfall, and the reduction in monthly expenses which will follow, means she won't have to go back to full-time work.
  • Our current debt consists of $225,000 mortgage, $56,000 LOC, $100,000 Home Equity Loan with Capital Direct. We also have 2 financed vehicles for about $350 each per month.
  • We have 2 children, 18 & 15. We have RESPs for each, but they will really only cover year 1 of a university education. Our eldest starts school in the fall.
  • We have no retirement savings. My work offers a matching program, but I won't be eligible to participate in that for another 6 months.

We have immediately paid off the LOC and will pay the HEL when the "window" opens in March to avoid extra fees. We have an appointment booked at the bank to discuss closing the mortgage -- I don't want to get stuck with excessive fees, if I can avoid it. The increased monthly cash flow (about $2200/month) and the piece of mind of not having those over-hanging debts is invaluable to us.

Next step would be to put aside some money for the kids to ensure they're both covered for school. We've got some renos to the house we'd like to do, and we'd like to put the rest away where it will work for us and actually allow me to retire and not work until I die.

The balance is currently about $700,000, sitting in a 3% Simplii account. Obviously, in our late 40s, we are looking for conservative risk with decent return. We don't have a financial planner. I've looked at WealthSimple and Nest Wealth... I'm thinking those are good options.

But, I've always gotten decent advice here, so to RFD I turn. What would you do in my shoes?
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81 replies
Sr. Member
User avatar
Oct 19, 2016
650 posts
205 upvotes
Toronto
The portion you wont need for another 10+ years, put it in stock market or buy real estate.
Deal Fanatic
User avatar
Aug 10, 2011
9517 posts
2078 upvotes
Somewhere
I wanted to say congratulations or "lucky you", but the manner in which inheritances come by, that might be inappropriate.

So.. I wish you and your family well in maximising the value of the inheritance.
:confused:
Newbie
Mar 19, 2012
47 posts
6 upvotes
Calgary
It sounds like you've done the right steps in addressing high interest debt. In terms of investing the rest for retirement, I would look into starting a globally diversified ETF portfolio. A conservative allocation based on your time horizon makes sense. Have you seen the couch potato portfolios? http://canadiancouchpotato.com/model-portfolios-2

Another very good option if you want the simplicity of 1 ETF is to go with any of Vanguards single fund solutions: http://canadiancouchpotato.com/2018/02/ ... d-solution.

Take your time researching and decide what's best for you and your family. Good luck!
Member
Jul 25, 2008
400 posts
274 upvotes
ottawa
This is an interesting thought exercise, really interested in seeing the responses.

Obviously, each individual situation is going to be different. You may want to talk to a fee only financial planner and/or a tax attorney to get this right. How to invest the money can be relatively straightforward - you seem to favour roboadvisors which is fine, though I'm sure posters are going to recommend either building your own ETF portfolio, buying a vanguard asset-allocation ETF (based on your inclusion of the word conservative, I'd guess VCNS), or td-eseries funds (if you're making regular small dollar additions or withdrawals, this can make sense, but in your case you're looking at a lump sum for likely a 10+ year term, so eseries might not make sense).

The more complicated question is WHERE to invest your money, as in what types of accounts, and whether you include your spouse's accounts, your 18 yo child's TFSA, and possibly even trust funds for both your kids. For this question, you really should talk to a planner to go over the options.

My first crack at it would be to assume because a) you're currently and expecting to remain a single-income household and b) you didn't mention RRSPs, filling up yours and your spouses RRSPs would make sense as you can split rrsp withdrawals in retirement and bring down your tax rate. You would likely deduct the RRSP deposits over a number of years to maximize your tax returns (eg, deduct enough to drop you a tax bracket or two every year). Your workplace matching program's features and limits will factor in to how you decide to contribute to your RRSP as well.

If we assume after paying down debt and filling your TFSAs (you + spouse = $115k limit) and rrsps (wild guess for you + spouse is $250k, check your last year's assessment to get the right numbers) you have over 400k left. Maybe this goes in a taxable investment account under your name, but trust funds for your kids could also be an option.
Deal Addict
Apr 21, 2014
2266 posts
1018 upvotes
Alberta
FinanceThrowaway wrote: Using a throwaway account (don't want to tie this in any way to my main RFD ID) for privacy/security reasons.

I just received a significant inheritance: $850,000. While certainly not enough money to retire to a life of luxury and leisure, it is enough to make some major changes for my family. My wife and I have had many challenges over the years, including a consumer proposal about 10 years ago, but we've come out the other side and we are currently doing "okay." This money will certainly set us up for the future, but I want to make sure we use it in the best way.

Our current situation
  • I earn about $125,000 annually. My wife hasn't worked in almost a year, on doctor's orders (stress). She was, previously, earning about $50,000. I suspect this windfall, and the reduction in monthly expenses which will follow, means she won't have to go back to full-time work.
  • Our current debt consists of $225,000 mortgage, $56,000 LOC, $100,000 Home Equity Loan with Capital Direct. We also have 2 financed vehicles for about $350 each per month.
  • We have 2 children, 18 & 15. We have RESPs for each, but they will really only cover year 1 of a university education. Our eldest starts school in the fall.
  • We have no retirement savings. My work offers a matching program, but I won't be eligible to participate in that for another 6 months.

We have immediately paid off the LOC and will pay the HEL when the "window" opens in March to avoid extra fees. We have an appointment booked at the bank to discuss closing the mortgage -- I don't want to get stuck with excessive fees, if I can avoid it. The increased monthly cash flow (about $2200/month) and the piece of mind of not having those over-hanging debts is invaluable to us.

Next step would be to put aside some money for the kids to ensure they're both covered for school. We've got some renos to the house we'd like to do, and we'd like to put the rest away where it will work for us and actually allow me to retire and not work until I die.

The balance is currently about $700,000, sitting in a 3% Simplii account. Obviously, in our late 40s, we are looking for conservative risk with decent return. We don't have a financial planner. I've looked at WealthSimple and Nest Wealth... I'm thinking those are good options.

But, I've always gotten decent advice here, so to RFD I turn. What would you do in my shoes?
Pay off all debts immediately including both cars. So that’s 381k plus the two cars (regardless of interest rate). Think what your life would be with ZERO payments.

Are you on a fixed rate or variable rate mortgage? Get them to calculate the penalty. It will almost always be cheaper then the interest you will be paying over the remaining mortgage anyway.

So now you make 125k without a car/house/debt payment that means everything you take home is liquid cash!!

If you guys try to play the interest rate arbitrage game given your level of debt and spending habits, you will increase your debt.

After all this you will be completely debt free including the house and two paid off cars, with about 350-400k excess cash plus a 120k income.

Then go ahead and start looking at investments.
Sr. Member
Dec 15, 2015
692 posts
504 upvotes
Toronto
A family member who was not savvy with money was in a similar situation as you.

They interviewed about 25 - 30 different financial planners/wealth managers. They ultimately picked Scotia Wealth Management and have been happy.
Member
Sep 16, 2017
347 posts
235 upvotes
why not pay off all high interest debt?

no point keeping 700k@ 3% when you are paying double digit % on loans.
Deal Addict
User avatar
Nov 18, 2007
3510 posts
609 upvotes
Valleywood
Nuke the debt, where penalties are not involved. Take advantage of any mortgage pre-payment options such as the yearly lump sum amount and monthly payment increase. At the next renewal, pay off the mortgage.

Start reviewing other topics here on RFD for choices of discount brokerages - assuming that you don't already have a choice.

Make a plan to catch-up on RRSP contributions. The deadline for 2017 is March 1st. I would do everything to get your two RRSPs (yours and spousal) funded, as mentioned. A healthy contribution to both, to an amount that gives the best tax benefit, will provide a great tax refund once 2017 taxes are filed. The quickest way to make a last minute RRSP contribution, is to walk into your favourite bank and open an RRSP. This will be an RRSP for mutual funds, GICs or preferrably cash. Once you have a brokerage account, make a transfer to get these bank RRSPs consolidated with your new self-directed RRSPs at the brokerage.

After the RRSPs, move onto the TFSAs and max them out. When the time comes, gift some money to the children for their TFSAs.

With all your accounts in place you can start researching the Couch Potato Portfolio or the new Vanguard funds.

Good luck.
Deal Fanatic
User avatar
Aug 22, 2005
7812 posts
986 upvotes
Crazy that you weren't hitting the RRSP all this time with a 125k salary. Probably could have even contributed to it and then used the refund for RESPs. Or not paid off the mortgage aggressively, and used that to contribute.

Anyway, it's not too late to start splitting it up between yours and spousal.

Just re-read about the consumer proposal, so that's prob why you couldn't contribute. My bad.
Newbie
Feb 20, 2018
6 posts
5 upvotes
op thats a significant amount of money. One thing for now, it would be best to keep the inheritance money in your name only.
Not wanting to look at the negative side, but inheritances are not subject to division as family property in case of marital breakdown. If put into a joint account, it could/would be considered family property and be subject to division in case of divorce.
Just something to think about in terms of protecting your family wealth. Might be worthwhile to talk to a lawyer for some legal advice since this is a lot of money.
Member
Dec 26, 2013
470 posts
159 upvotes
Ottawa
Canagood wrote: op thats a significant amount of money. One thing for now, it would be best to keep the inheritance money in your name only.
Not wanting to look at the negative side, but inheritances are not subject to division as family property in case of marital breakdown. If put into a joint account, it could/would be considered family property and be subject to division in case of divorce.
Just something to think about in terms of protecting your family wealth. Might be worthwhile to talk to a lawyer for some legal advice since this is a lot of money.
also dont attribution rules apply if he is maxing out his wifes RRSP/TFSA, which would also apply to his children as another poster suggested? If his wife had a salary he could of just claimed he paid all tbe bills and all her net income went to her own investments, but this doesnt seem to be the case.
Newbie
Jul 28, 2007
83 posts
16 upvotes
I'm always amazed when I hear people making 6 figure salary but have no rrsp
[OP]
Banned
Feb 20, 2018
3 posts
4 upvotes
HBP wrote: Crazy that you weren't hitting the RRSP all this time with a 125k salary. Probably could have even contributed to it and then used the refund for RESPs. Or not paid off the mortgage aggressively, and used that to contribute.

Anyway, it's not too late to start splitting it up between yours and spousal.

Just re-read about the consumer proposal, so that's prob why you couldn't contribute. My bad.
El-Cheapo88 wrote: I'm always amazed when I hear people making 6 figure salary but have no rrsp
Yeah, I probably should have made that clearer. I did speak of our "challenges" over the past 10-15 years. Without going in to much detail, I've been dramatically underemployed since about 2004, not earning more than $40K in any year since. I just landed this new job about 6 months ago, hence the ineligibility of the RRSP matching for another 6 months.

Thanks for all the tips. I guess we will continue to research before making any decisions. I like the idea of the "robo-advisors" because I don't (obviously) have a financial advisor in my Rolodex, and I like that WealthSimple/Nest Wealth offer human "advisors." I don't know how good they'll be; I suppose a phone call will illuminate there. Given the amount we're talking about, I'll probably go with Nest Wealth. I read somewhere today that above $265,000, the fees there are dramatically less than WealthSimple.

I'm glad to see the recommendations to pay off the big nuts ASAP. That means our thinking was on the right path. I will definitely dump a bunch into an RRSP before March 1. No need to pay taxes if it can be avoided. My available RRSP amount is $200,000. Though I don't imagine it'll take that much to reduce payable tax to zero. I'm not sure about paying off the cars; we'll have to table that and look at the math a bit more closely.

Thanks again, and please feel free to continue to offer tips and suggestions! I will monitor this thread closely.
Deal Addict
Aug 20, 2007
1932 posts
712 upvotes
Kitchener
Personally I would not immediately pay off debts. Depending on how you want to invest that money you may be able to generate enough cash flow from your investments to cover some/most of your on going expenses while principle staying in place. For example, if you invest that 850k at 5% your grossing, over 40k a year. Even after tax that would probably cover your mortgage, car payments. You can then redirect your other cashflow to help your kids with their education. At least at first and see how it goes. Reason I recommend this is that by having the principle at your disposal you leave yourself options in the future. If you were to pay off all your debts now, your cash flow would be increased but what if something happened to you where your income again was impacted? or your wife gets sicker? At that point you'd need to borrow against your assets which would mean lower cash flow during a time where your cash flow would already be negatively impacted.
Deal Addict
Apr 21, 2014
2266 posts
1018 upvotes
Alberta
FinanceThrowaway wrote: Yeah, I probably should have made that clearer. I did speak of our "challenges" over the past 10-15 years. Without going in to much detail, I've been dramatically underemployed since about 2004, not earning more than $40K in any year since. I just landed this new job about 6 months ago, hence the ineligibility of the RRSP matching for another 6 months.

Thanks for all the tips. I guess we will continue to research before making any decisions. I like the idea of the "robo-advisors" because I don't (obviously) have a financial advisor in my Rolodex, and I like that WealthSimple/Nest Wealth offer human "advisors." I don't know how good they'll be; I suppose a phone call will illuminate there. Given the amount we're talking about, I'll probably go with Nest Wealth. I read somewhere today that above $265,000, the fees there are dramatically less than WealthSimple.

I'm glad to see the recommendations to pay off the big nuts ASAP. That means our thinking was on the right path. I will definitely dump a bunch into an RRSP before March 1. No need to pay taxes if it can be avoided. My available RRSP amount is $200,000. Though I don't imagine it'll take that much to reduce payable tax to zero. I'm not sure about paying off the cars; we'll have to table that and look at the math a bit more closely.

Thanks again, and please feel free to continue to offer tips and suggestions! I will monitor this thread closely.
As mentioned in a previous post of mine, paying off the cars is no brainer to me. That is draining $700 a month out of your cash flow. Unless it’s at 0 percent, then it’s a smart move. Can you make a bit more in investments, sure. But with investments you want to let it grow, so you are not really getting income each month. But with paying off your cars you are getting a 700 dollar after tax raise each month that you can actually use for other things.

I do understand that you were significantly underemployed until recently, but if you guys had a consumer proposal 10 years ago and are still that much in debt leads me to believe that’s it’s a spending behavior issue, and trying to be “too smart” with a few percentage points is not a good idea in your situation.

It’s like the whole rent vs buy argument. If you invest the difference then you “could” come out ahead if you run the numbers. But not many people have the discipline to do that and just purchase extra consumables with the difference.

You also got to factor in risk. Investments can go up and go down. In the end I don’t know anybody who would say “I wish I didn’t pay off my house and cars to become debt free”.
Deal Fanatic
User avatar
Jan 27, 2007
5079 posts
941 upvotes
Peterborough
My opinion in general:

MAX RESP
MAX RRSP
Pay down all debt

Remainder in an unregistered account in wifes name earning dividend income.

OP - At a salary of $125,000, you really should have excess cash flow and been investing excess every month even with your wife not working. I would take a hard look at your expenses and lifestyle. With this windfall you could be looking at early retirement if you plan things right.

Look at a fee only planner to determine what to invest in and in what percentages.
Deal Fanatic
User avatar
Nov 19, 2004
8954 posts
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Cambridge, ON
Do attribution rules not apply? Putting things in the spouse's name won't make a difference will it? He is still the contributor so any investment gains get attributed back to him.
Member
Jul 25, 2008
400 posts
274 upvotes
ottawa
don242 wrote: Do attribution rules not apply? Putting things in the spouse's name won't make a difference will it? He is still the contributor so any investment gains get attributed back to him.
Not an expert, but here is my layman's understanding:

TFSA - there is an exception (http://www.advisor.ca/tax/tax-news/navi ... les-238420). You have to gift the money to the spouse first, so understand the legal implications of that in the event of a relationship breakdown.
RRSP - use a spousal RRSP, be careful on withdrawal around attribution rules: http://www.advisor.ca/tax/tax-news/navi ... les-222411
non-registered/taxable - Attribution rules apply. Should not give money to spouse to invest in a non-registered account. Note - there are no attribution rules for adult children or siblings, just spouses and minor children. (because the OP has an 18yo and a teenager getting closer to university, i'll add this link: Give your kids money https://www.theglobeandmail.com/globe-i ... e19854045/)
Member
Jul 25, 2008
400 posts
274 upvotes
ottawa
FinanceThrowaway wrote: Yeah, I probably should have made that clearer. I did speak of our "challenges" over the past 10-15 years. Without going in to much detail, I've been dramatically underemployed since about 2004, not earning more than $40K in any year since. I just landed this new job about 6 months ago, hence the ineligibility of the RRSP matching for another 6 months.

Thanks for all the tips. I guess we will continue to research before making any decisions. I like the idea of the "robo-advisors" because I don't (obviously) have a financial advisor in my Rolodex, and I like that WealthSimple/Nest Wealth offer human "advisors." I don't know how good they'll be; I suppose a phone call will illuminate there. Given the amount we're talking about, I'll probably go with Nest Wealth. I read somewhere today that above $265,000, the fees there are dramatically less than WealthSimple.

I'm glad to see the recommendations to pay off the big nuts ASAP. That means our thinking was on the right path. I will definitely dump a bunch into an RRSP before March 1. No need to pay taxes if it can be avoided. My available RRSP amount is $200,000. Though I don't imagine it'll take that much to reduce payable tax to zero. I'm not sure about paying off the cars; we'll have to table that and look at the math a bit more closely.

Thanks again, and please feel free to continue to offer tips and suggestions! I will monitor this thread closely.
Given the tight timeline this is probably your immediate priority.
a few things to consider:
1. You need to find out the details of your workplace matching program. If there is generous matching, you may want to wait until next year for your RRSP contributions once you're eligible for the workplace matching.
2. You may actually not want to reduce your taxes to zero, and stretch out the deductions over a number of years. There are two discrete actions here - 1: contributing to the RRSP/RRSPs and 2: claiming the deduction on your taxes. You likely want to contribute up to your limit in order to defer taxes on the growth until retirement, but you need to map out your schedule for claiming the deductions. That's going to depend on how stable your new job is, how long you expect to work, the time value of money, and other factors. For example, if you're in Ontario in the 43.4% marginal tax bracket, you may only deduct enough to drop you down to a taxable income of 87k (the 33% tax bracket). Next year, you would deduct enough to drop you down to the same tax bracket (89k for 2018), and continue doing this for the next few years. Paying zero taxes this year and/or next year might not make sense if you then have to go back to paying 43.4% or even higher a few years down the road.

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