An inheritance can be impacted by:
·
Life
expectancy and retirement age
·
Unanticipated
events and health care expenses
·
Challenging
markets, interest rates and inflation
·
Taxes on
death
·
Family
size
Life expectancy and retirement age
Thanks to healthier lifestyles and
medical advances, we are living longer, almost ten years longer than the
average life expectancy five decades ago. This is good news – in terms of
retirement dollars, those additional years demand a significant amount of retirement
savings – especially if one considers the extra health care needs that
typically go hand-in-hand with ageing.
Unanticipated events and health care
expenses
Longer lives mean an increased risk of
needing costly medical care or daily living assistance within one’s lifetime.
While some government funding kicks in for all Canadians, there are limits, and
coverage varies across provinces. In 2006, 45% of mature Canadians (50 years
and older) reported spending more money on living and medical expenses than
they had planned. This is not unexpected, as the charges for basic
accommodation in publicly supported long-term care institutions ranged from
$540 to $3,960 a month per person. Hence, Canadians can anticipate paying more
out of their own pockets to cover medical essentials and long-term care
services in the future.
Challenging markets, interest rates and inflation
Seniors, who typically invest more in fixed-income products such
as GICs and bonds, are forced to balance a low rate of return with a higher
rate of taxation, as compared to capital gains and Canadian dividend income. As
a result, many may be forced to use up more of their assets than originally
anticipated simply trying to keep up with rising inflation costs, leaving
little behind for their successors. Meanwhile, Boomers on the brink of
retirement may be faced with smaller nest eggs with which to fund their
retirement lifestyles if their portfolio value declined with the stock market.
The potential result is an inheritance that could shrink from one generation to
another.
Taxes on death
Although there are no estate taxes in Canada, a significant
proportion of an inheritance could be consumed by probate fees and capital
gains taxes due upon death Not only can taxes and probate fees erode the value
of an estate, they could force the sale of assets. For instance, a family
cottage or investments may have to be sold as heirs try to come up with the
funds to pay the taxes, probate, executor, trustee and legal fees. Being forced
to sell assets to cover fees could negatively impact the net value of the
estate.
Example: How taxes could reduce an
inheritance
Margaret is a widowed mother of
three adult children who live in Ontario and has significant assets registered
in her name only. Her assets include RRSPs worth $250,000 and investments
valued at $100,000 (for which she paid $50,000). Upon her death, the total
estate value will be $350,000. However, this is not the amount that will be
distributed to her children, because there will be taxes charged on her
investments. The estate will need to pay approximately $115,000 in taxes on her
RRSPs and $11,500 on her investments (assuming a top marginal rate of 46%15).
Assuming she has no other outstanding debts to be settled by her estate, the net value of her estate will be $223,500 which may be further reduced by
probate, executor, trustee and legal fees.
Family size – Many ways to split the pie
Boomers represent a large percentage of the world’s population.
In Canada, Boomers account for approximately 30% of our population. It stands
to reason that any legacy that the Boomers’ parents leave behind is likely to
be split between multiple siblings.
But the demand for a slice of the pie does not end there. Children
are not the only ones to inherit this wealth. In the recent BMO Retirement
Institute Inheritance survey, both seniors and Boomers indicated that they are
planning on leaving an inheritance to someone other than their spouse/ partner
or child. Moreover, seniors are more likely than Boomers to plan on leaving an
inheritance to a grandchild (37% vs. 18% respectively) or to a charitable
organization (28% vs. 18% respectively). Ultimately, this may reduce the size of
the inheritance that many expect.
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