Factors impacting size of your inheritance

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 ranging 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 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 Registered Retirement Savings Plans (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.