It’s something you see on a bumper sticker but there might be some truth to the saying, “I’m spending my kids’ inheritance.”
A new survey finds the estimated $1-trillion dollar transfer of wealth forecast to occur in the next 20 years is not happening exactly the way the would-be recipients might have hoped.
Investors Group says more than half of Canadians are expecting an inheritance and the ones who think they know the amount expect it be more than $100,000. Too bad for them the same survey found the average size of the windfall, among those who disclosed the amount, was $57,000.
“It’s really hard to know how much will or won’t be transferred,” says Christine Van Cauwenberghe, director of tax and estate planning at Investors Group. “You can tell people are taking educated guesses about how much they will or won’t receive. As they get older, they seem to have less and less expectation of inheriting. That could have something to do with people becoming realistic about the fact people are living longer and spending more in retirement.”
The survey found 53% of Canadians think they will receive an inheritance but the expectation declines with age. For Generation Y Canadians, aged 18-29, 80% expected to cash in. But for Generation X Canadians, aged 30-44, the expectation drops to 62%. By the time you get to the Baby Boomers, 45-64, the expectation drops to 48%.
Ms. Van Cauwenberghe, who is an estate lawyer, says she sees a lot of clients in her practice who have non-traditional family structures that can ultimately eat away at inheritance for children.
“We are seeing lots of blended families, common-law relationships, kids from two or three different relationships. The estate is just being carved up into more and more pieces,” she says. “People are starting to see there is no guarantee they are going to get mom and dad’s estate.”
The truth is for many Canadians knowing how much money their parents have is a mystery. The survey found of the 40% of Canadians who say they have a will, 39% say they have not discussed the terms with children. A further 61% of Canadians with deceased parents who had a will, admit they never talked about the subject.
“I would find it the exception to the rule for a parent to disclose the exact amount they have,” says Ms. Van Cauwenberghe. “We encourage parents to speak to children about how they are going to structure their estate.”
The uncertainty about how much you might get makes it a bit perilous to count on cash. “I don’t think it’s appropriate to really bank on it,” says Ms. Van Cauwenberghe. “A lot of people do their plan relying on their own resources and if they get it, that’s great. But they shouldn’t be counting on it to fund their lifestyle.”
Ted Rechtshaffen, a certified financial planner with TriDelta Financial, says he may be in the minority but he encourages clients to count on their inheritance when planning to a certain degree.
“We ask are you going to have to support [parents or in-laws] or are you likely to get an inheritance,” says Mr. Rechtshaffen. “If the answer is yes there will probably be an inheritance and I don’t want to count on that, I tell them to be super conservative.”
Children may not know the exact net worth of their parents but they’ll have an idea and they can almost always value the house mom and dad live in. If parents let it be known they are splitting the money between say four kids and have a $2-million house, you can easily estimate $500,000.
“Sure, be conservative and call it $350,000,” says Mr. Rechtshaffen. “If it’s that much, that makes a serious difference to your financial plan and what you need to save. To ignore it is kind of dumb.”
He has some exceptions. Obviously the younger your parents, the less likely you’ll be seeing the money any time soon or of another issue coming up like a second marriage.
“I know it goes against the grain because you are counting on money you don’t have,” says Mr. Rechtshaffen, adding it depends where parents are in lifecycle and how clearly they have signalled their intentions.
Craig Alexander, chief economist with Toronto-Dominion Bank does say longer and healthier lives could change the equation for how much wealth is transferred to the next generation.
“There will be less money to transfer. You have to remember how high the cost of living is in your final years. People underestimate what a nursing homes costs if you want to live with a better than average standard of living,” says Mr. Alexander.
Respondents in the survey don’t sound like they are going to take any chance with 45% of those 60 or older concerned they are going to need their savings to fund their retirement. That doesn’t sound like there will be much left for the kids.