Much has been made of the trillion dollar wealth transfer expected to take place over the coming 20 years, as the accumulated assets of the massive boomer generation is handed down to their children. But the expectations of those heirs may be quite inflated, according to a survey by Investors Group.
While just over half (53%) of Canadians expect an inheritance, 57% of those expectant heirs think the value of that bequest will exceed $100,000. By comparison, those who have already received an inheritance (and are willing to hint at its size—47% said it was none of the survey’s business) say the amount was, on average, $57,000.
Only 18% said it exceeded $100,000, while 26% said it was less than $5,000.
“A lot of people are making guesstimates about what their parents’ real property is worth or what retirement assets they have,” says Christine Van Cauwenberghe, director, tax and estate planning at Investors Group. “For the most part it’s just an educated guess. Most parents are loathe to discuss specifics.”
She doesn’t recommend that parents even discuss their financial assets in too much detail, saying that it’s a better idea to talk about the wealth transfer in general terms. Certain assets—a business or a cottage—are difficult to set a value on, but planning measures can be taken to minimize the tax implications of that inheritance.
“In very rare cases would a parent tell a child how much they have in the bank, and quite frankly, they don’t even know if that’s going to be there on the date of death,” she points out.
“People are living longer and expect more from their retirement; they expect to spend more,” she says. “They may have a fair bit of money now, but it’s impossible to know how much they’ll have at time of death.”
Complicating matters is the proliferation of “non-traditional” family structures, meaning an estate could be divided up between past and present spouses, as well as the children from various relationships.
Then again, parents may opt to leave a significant amount of their estate to charity.
Perhaps proving that wisdom comes with age, the expectation of an inheritance declines with the age of the survey respondent. Eighty percent of Gen Y (age 18 to 29) expect an inheritance, versus 62% of Gen X (30 to 44 years) and 48% of boomers (45 to 64).
“I think people become more realistic as they get older, about what may or may not be coming,” she says. “Younger Canadians in particular don’t understand how much it costs to live through retirement, or what kind of tax ramifications there might be on an estate.”
Junior might know that his parents have $500,000 in their RRSP, but by the time they get their hands on that inheritance, it may only be $300,000.
For advisors, she recommends that potential inheritances be treated as a windfall, and not be factored into the overall financial plan. Neither the amount, nor the timing of its receipt can be accurately predicted.
“In many cases, the second parent doesn’t die until they’re in their 90s,” she says. “Do you really want to live your life waiting for your second parent to die? You need to take control of your own finances, and do your own retirement planning.
“It is a gift. It is not a guarantee.”