Waiting on an inheritance may backfire
More Canadian homeowners are carrying mortgage debt into their retirement years
“This generation doesn’t cut coupons like their parents did, so this generation has a lot of debt.” LES KOTZER WILLS AND ESTATES LAWYER
More Canadians are still paying off their mortgage when they retire or relying on their home equity to fund that retirement. That means children or grandchildren expecting an inheritance to help pay off their own debts might be playing a dangerous game.
More than half of Canadian homeowners plan to carry their mortgage debt into their retirement years, according to a 2012 report from BMO Retirement Institute.
And almost 20 per cent of homeowners anticipate having to leverage the value of their home equity to supplement their retirement income, according to a 2014 poll by Manulife Bank of Canada.
That means they might not have much of a legacy to leave their children or grandchildren. And they might be left with even more debt if interest rates go up or the value of their home falls (which is happening in Alberta, thanks to plummeting oil prices).
There’s no harm in having an expectation of an inheritance to fund the achievement of certain financial goals, whether that’s home ownership or retirement, said Chris Buttigieg, senior manager of wealth planning strategy at BMO.
But that should be built into a financial plan.
“You’ve also got to be prudent and plan for the other scenario,” he says.
We’re an aging society, but we’re living a lot longer, Buttigieg points out. “If people are living longer they’re going to need their savings to last longer, so that’s going to impact the size of an inheritance,” he says.
As people age, there’s also a higher prevalence of health issues, so unforeseen expenditures such as longterm care could also impact the size of an inheritance.
In 2006,1.5 million Canadians were relying on an inheritance to fund their retirement, according to BMO. They expected to receive, on average, about $150,000 in cash and $150,000 in non-cash assets, such as a property. In reality, they received around $56,000.
Buttigieg says relying on an inheritance is like buying a lottery ticket.
“With an inheritance, there are unknowns, such as the timing of when an inheritance may be received,” he says. “And a bigger question mark is the actual monetary value, whether there will be anything at all.”
There are several factors affecting the size of an inheritance: market volatility, interest rates, inflation and taxes.
Say, for example, a couple bought a cottage in Muskoka 50 years ago for $20,000 and it’s now worth $500,000. If the couple wants to pass on that cottage to their children, they may not realize their children will be responsible for paying the tax on a $500,000 piece of property — which may substantially cut into the inheritance they were expecting.
Aside from market forces, different generations have different ideas on how they want to spend their retirement income — and how much of it they want to pass on.
The “Great Generation” survived the Great Depression and two world wars, so they’re used to hardship and typically have been frugal with their money, says Buttigieg. They’re more likely to have a pension and more likely to leave an inheritance to their children.
But the boomers are different. They’re leaving their 9-to-5 careers to do some consulting, volunteering or travelling. And they’re looking to spend at least some of that retirement money on their own pursuits — and the kids will get whatever is left over.
Boomers are also loaded with debt, says Les Kotzer, a Toronto-based wills and estates lawyer, and author of four books on the subject. And the generations after them are going to have financial issues because they’re also spenders.
“This generation doesn’t cut coupons like their parents did, so this generation has a lot of debt,” says Kotzer.
“There’s a lot of money coming down, and as these parents pass, you start to get these phone calls: ‘Where’s my money?’ ”
Indeed, BMO found about one trillion dollars will change hands from the Great Generation to boomers in the next two decades. More is at stake and that means we’re seeing more inheritance squabbles end up in the courts.
Kotzer says some family members are “waiters” in the sense they’re waiting for their inheritance so they can pay off their own debts. But problems can arise when they’re so reliant on an inheritance — or feel entitled to Mom and Dad’s money as if it’s their own — that it causes family rifts.
“The fact is that some people view inheritance as a mattress to fall back on,” says Kotzer.
Having an up-to-date will and appointing a power of attorney are crucial. But it’s also important for parents to have an open dialogue with their children to avoid misgivings and misunderstandings, says Buttigieg.
“It’s one of those tough-to-talkabout conversations,” he says.
But when it comes to inheritances, there’s often a lot of assumptions and speculation, so it’s better to get everything out in the open and come up with a solid financial game plan.