Canada is entering an age of unprecedented wealth transfer for parents and children, which is why the market should brace itself for these shifts, according to Toronto-based certified financial planner Jason Heath.
Over the next decade alone, Canadian inheritances are likely to run as high as $1 trillion, Heath wrote recently for the Financial Post.
Heath cited a survey by Merrill Lynch and Age Wave that pointed to the possible intensity of this wealth transfer: Approximately 47% of respondents aged 55 and older and 36% of boomers said leaving an inheritance was “the right thing to do” for their children. Around 55% of millennials also believe that “it’s a parent’s obligation” to leave an inheritance.
This will not come without its significant challenges, however.
“Some recipients see [an inheritance] as a windfall and spend it frivolously. Others see it as blood money and feel a great burden when they inherit,” Heath said. “My best advice to someone receiving an inheritance is not to rush to make decisions. If the money sits in a bank account for six months, it will unlikely make or break you financially in the long run. It can take months or years to mourn a death.”
The burden on the elderly is even more pronounced, Heath added.
“Many people spend their working years scrimping and saving to be able to afford to retire,” Heath said. “Inheritance pressure after retiring may limit spending in retirement. It insinuates that workers need to save for not only retirement, but also their apparent inheritance obligation to their children.”
This also has implications on how Canada’s seniors will see reverse mortgages moving forward.
“I am not sure how borrowing against an asset that is hopefully appreciating over time is so different from selling that same asset, to downsize, rent, or move into a retirement home, and spending the net proceeds,” Heath said. “Whether or not a reverse mortgage or staying in their home is best for a senior would depend on financial considerations as well as their health. But given a primary criticism of a reverse mortgage is the reduction of an estate’s value, this echoes the inheritance obligation narrative.”