So You’re Set to Receive an Inheritance: Here’s What to Do

Receiving an inheritance can be life-changing, but it also comes with important financial, tax, and legal considerations. Whether it's a sum of money, real estate, or investments, knowing how to manage your inheritance can help you make the most of it while avoiding unnecessary complications. Here’s what to do when you find out you're receiving an inheritance in Canada.

1. Take Time to Process the News

Dealing with an inheritance often comes during a period of grief. Before making any big financial decisions, allow yourself time to process the emotional aspects of your loss. Making rushed decisions while grieving can lead to choices you may later regret.

Immediate Steps:

• Wait before making any large purchases or investments.
• Avoid making any commitments to friends or family about sharing the inheritance right away.
• Consult with a trusted financial advisor or estate lawyer for initial guidance.

2. Understand the Type and Size of Your Inheritance

Not all inheritances are the same. You may inherit cash, real estate, investment portfolios, businesses, or even valuable collectibles. Each asset comes with its own implications.

Key Considerations:

• Cash inheritances are the easiest to manage but require planning to ensure they last.
• Real estate may require property taxes, maintenance, or decisions on whether to keep or sell.
• Investments may have tax implications depending on the type of account they are held in.
• Business ownership might involve operational responsibilities or selling shares.
• Personal assets such as jewelry, art, or family heirlooms may need appraisals.

3. Be Aware of Tax Implications in Canada

Unlike some other countries, Canada does not have an inheritance tax. However, there are important tax considerationsto keep in mind.

Canadian Tax Rules:

• The estate, not the beneficiary, pays taxes on capital gains from the deceased’s assets.
• Registered accounts like RRSPs and RRIFs are considered fully taxable income upon death unless they roll over to a spouse or dependent.
• Non-registered investments may trigger capital gains taxes upon sale.
• Rental or real estate properties may be subject to capital gains tax if sold for more than their original purchase price.

For a deeper understanding, visit the Canada Revenue Agency’s guide on estate taxation.

4. Review the Will and Legal Documents

It’s important to review the will to fully understand the terms of your inheritance. The estate executor will guide you through this process, but you may also want to consult a lawyer for additional clarity.

Steps to Take:

• Request a copy of the will and estate documents from the executor.
• Verify any conditions attached to the inheritance (e.g., trusts, staggered payments).
• Check for any outstanding debts of the estate that may impact your share.
• If disputes arise, consider legal assistance to navigate challenges.

5. Work with Professionals to Manage Your Inheritance

Professional guidance ensures that you maximize your inheritance while avoiding costly mistakes.

Key Advisors to Consult:

• Financial Advisor: Helps with investment decisions, tax efficiency, and long-term wealth management.
• Estate Lawyer: Reviews the will and ensures legal compliance.
• Tax Accountant: Assists in minimizing tax burdens and handling estate tax issues.
• Real Estate Agent: Provides advice if selling inherited property.

6. Make a Financial Plan

Creating a plan for your inheritance ensures that it benefits you for the long term.

Financial Planning Considerations:

• Eliminate high-interest debt (e.g., credit cards, loans) before making investments.
• Build an emergency fund with at least 3-6 months of expenses.
• Invest wisely based on your risk tolerance and financial goals.
• Save for retirement by contributing to RRSPs or TFSAs for tax advantages.
• Plan for future expenses like home purchases, children’s education, or personal goals.

7. Decide Whether to Keep, Sell, or Donate Assets

If you inherit property, business assets, or valuable collectibles, you must decide whether to keep, sell, or donate them.

Considerations for Real Estate:

• Is the property financially sustainable to maintain?
• Would selling provide a better financial return?
• If keeping, should you rent it out for passive income?

Considerations for Investments:

• Are there capital gains taxes to consider?
• Does the portfolio align with your risk tolerance and financial goals?
• Should you reallocate or diversify investments?

Considerations for Personal Items:

• If you don’t need or want inherited valuables, consider selling or donating them.
• Charitable donations may provide tax deductions.

8. Be Cautious About Requests for Money

When people learn you’ve received an inheritance, you may face requests for financial assistance from friends or family members.

How to Handle Requests:

• Set personal boundaries before agreeing to help others.
• Ensure your own financial stability before giving money away.
• If gifting money, be aware of tax implications on large financial transfers.
• Consider working with a financial planner to structure charitable donations or family assistance wisely.

9. Avoid Common Inheritance Mistakes

Many beneficiaries make errors that can reduce the long-term value of their inheritance. Avoid these common mistakes:

• Spending too quickly: Without a financial plan, an inheritance can disappear faster than expected.
• Ignoring tax implications: Failing to account for capital gains or tax consequences can be costly.
• Not diversifying investments: Avoid putting all assets into one type of investment.
• Failing to seek professional advice: An inheritance can significantly impact your financial future, so get expert guidance.

10. Review and Update Your Own Estate Plan

Receiving an inheritance is a great reminder to ensure your own estate plan is up to date.

Steps to Take:

• Update your will to reflect new assets.
• Assign or adjust beneficiary designations on accounts like RRSPs, TFSAs, and life insurance.
• Consider setting up a trust if you want to manage how your own assets are distributed.
• Ensure you have power of attorney documents in place for future planning.

Receiving an inheritance in Canada comes with many financial and legal considerations. Taking the time to understand your options, seek professional advice, and plan wisely can help you make the most of your newfound assets. Whether you choose to save, invest, donate, or spend, managing your inheritance thoughtfully will ensure that it benefits you—and possibly future generations—for years to come.

Disclaimer: This article provides general financial and legal guidance but is not a substitute for professional advice. Always consult with a financial advisor or estate lawyer for personalized recommendations.