What to do when inheriting a large sum of money (C$2M+)
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Thread: What to do when inheriting a large sum of money (C$2M+)

  1. #1
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    What to do when inheriting a large sum of money (C$2M+)

    I am aware that Rule #1 of a large inheritance is do NOTHING right away to avoid stupid decisions etc.. Obviously sitting down with a financial planner is also of the utmost importance, especially due to our unsophisticated investment knowledge, but I wanted to start getting a feel for things.

    Something in the range of C$1.75-2M. It is comprised primarily of two UK properties which I have no intention nor desire to keep. This amount is after the 40% UK inheritance tax comes off the top. An additional C$500K would be added to the mix, in two ~C$250K chunks at various times in the next 10-15 years. I recognize that counting on an inheritance is never really a wise retirement/investment strategy. However, due to existing circumstances, including diligent estate planning by family, plus numerous factual conversations with everybody involved, the surprises are greatly reduced for when that time comes. As such, I’m in a rather unique situation that I have yet to see discussed in “normal” retirement/inheritance/investing conversations. Essentially, a fortunate position of being very “asset rich” but relatively cash poor, with exactly enough for day to day living, and living with essentially zero debt.

    Current situation:

    Aged 50, earning $35K/year and wife earns $10K/year
    Company pension worth approx. $1500/mth at age 65
    No other retirement income beyond OAS/CPP.
    No RESP or TFSA’s
    Approx. $55K in unused RSP contribution room.
    Mortgage free house in Toronto, worth approximately C$1M
    No other significant assets.
    No debt other than a $5K used car loan ($250/mth for 2.5 years).
    Three kids, 19, 15, and 11. The eldest currently runs his own small business in a partnership.

    No current plans for retirement but would be happy to retire almost immediately if financially practical. As a family we have been happy living a very frugal lifestyle (no pricey annual vacations, no new fancy cars, no meals out, all second hand clothes) and that is likely to continue. Having said that, there is some pent up demand for travel and adventure but it wouldn’t be excessively extravagant or particularly frequent. More along the lines of a week long cottage rental here and there etc. Also, there is a “wish list” for our home, but not a $400+K gut-job renovation. Something in the region of $150K would more than cover what’s required.

    There are no plans to “downsize” our home in the future as we age. We intentionally purchased a small home in the perfect neighbourhood. Even though at times it has been a tad too small for us all, it was done with an eye to the future. This has kept the operating expenses low and we won’t need to move to a smaller home later in life.

    As far as investing in real estate, we would be unlikely to want to become landlords. However, a modest cottage in Muskoka, for personal use or perhaps a second property in Toronto for our child to live in, at a reduced rent perhaps with a roommate, would be something to consider.

    Although the money may well be in two separate cheques, a number of weeks./months apart. Since deposits are only CDIC insured up to C$100K, depositing a lump sum of $1M+ in a single account is a little never wracking. Albeit, safer in a Canadian bank that most places, but still. There is the immediate practical concern of exactly WHAT do you do in the immediate moment after receiving the cheque?

    And once that initial hurdle is crossed, then what….


  2. #2
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    Welcome to the forum. I can help answer your first question. You are correct that CDIC only insures up to 100K of deposits (per issuer name). In the following I am assuming we are not worried about tax efficiency of this temporary money parking. Let's say you are going to receive 2M.

    Your best option is probably to convert the cash to securities in a discount brokerages. Create an account at one of the big bank discount brokerages. Only go with the big banks. Here are some sensible things you can buy with the large amounts of cash, intended for short term storage:

    1. Short term bonds govt bonds, backed by the Government of Canada. For example through TD Direct Investing, you can buy the Government of Canada bond with coupon 1.5% maturing Sept 2017. You can buy up to 1M of this at the moment and it would cost you 1,006,844. If you leave it to maturity, on September 1 you'd be paid out 1,007,500. Although it yields very little, this is safe storage of cash that is fully backed by the government. Note however if you sell before maturity you will lose about $3,000 due to the bid/ask spread (on 1M).

    2. XSB - the iShares short term bond fund. This is a good place to park cash but it does fluctuate in price a bit so there is a mild risk of loss over the short term. Over a period of 1-2 years there is virtually no risk of loss. Because of the high volume and liquidity you could probably put 500K here in a day. Split over two days and you can definitely store 1M in XSB. Even on a low volume day it trades about 4M worth, so one day's purchases of 500K are only 13% of the day's volume.

    3. HISA (high interest savings account) vehicles. See this info page from TD, but all big banks have these. These are purchased using mutual fund codes but they are CDIC insured deposits, up to 100K. Here's what's interesting though. There are multiple fund codes for the different issuers. You can buy 100K each of TDB8150, TDB8155, TDB8157, TDB8159. This will let you have 400K of CDIC insured deposits, yielding 0.75% each. And they are totally liquid -- you can remove the cash any time with no fees.

    Here's what I might do if I was going to receive 2M and wanted to keep it safe. I'd put 1M in the Sept 1 government bond. I'd put 400K into four CDIC insured savings account vehicles. And finally I'd put 600K into XSB, recognizing that there is some price fluctuation with this one. (Even if XSB does decline in price, just wait a few more months and it will bounce back ... it is virtually guaranteed to have a positive return once the time span reaches 3 years).

    Storing 2M of cash has never been easier! I'm very conservative and I would not lose sleep with the above arrangement.

  3. #3
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    I forgot another option, and all these 4 options I'm listing can be done within a single discount brokerage

    4. GICs. If you're willing to lock money into GICs (some of which are as short as 3 months I think), you can put even more money into CDIC insured GICs. You can look at their inventory and buy GICs from different banks. e.g. put 100K into an RBC GIC, another 100K into a Manulife one, etc. I'm sure you could easily find a handful of issuers and put 100K into each.

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  5. #4
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    Quote Originally Posted by james4beach View Post
    ... 3. HISA (high interest savings account) vehicles. See this info page from TD, but all big banks have these ...
    This will let you have 400K of CDIC insured deposits, yielding 0.75% each. And they are totally liquid -- you can remove the cash any time with no fees.

    Where one doesn't mind another account login as well as keeping track of it, there's online banks such as PCF, Tangerine or EQ bank.


    Quote Originally Posted by james4beach View Post
    I forgot another option, and all these 4 options I'm listing can be done within a single discount brokerage

    4. GICs. If you're willing to lock money into GICs (some of which are as short as 3 months I think), you can put even more money into CDIC insured GICs. You can look at their inventory and buy GICs from different banks. e.g. put 100K into an RBC GIC, another 100K into a Manulife one, etc. I'm sure you could easily find a handful of issuers and put 100K into each.
    I've seen at my broker in the past, in addition to the usual 1, 2, 3, 4, 5, 6, 7 & 10 year GICs, short term GICs. Ranges have been 0-59 days, 60-89 days, 90-119 days, 120-179 days, 180-269 days and 270-364 days. I believe I have also seen cashable GICs as well.


    Cheers

  6. #5
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    I assume the testator in this case is still alive and of sound mind and living in the UK.
    If this is the case, there may be some mechanisms they can employ to save you money. Not sure if you or they would want to pursue them, or if, based on the amounts, they would be worthwhile.
    An off shore testator can set up trusts that can help you avoid some taxes on this money.
    This might depend on the nature of the property in the UK and whether there are other beneficiaries and where they are located. And of course how willing and able the testator is to set it up.
    If you want to explore this, I would talk to one of the large trust companies, either TDCanada Trust or Royal Trust and ask to speak with a trust officer familiar with off shore trusts. Explain your situation and they should be able to explain the mechanics of this and the process and costs.
    Cheers
    J

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    What is your goal with the 2 million dollars? I mean, by the sounds of it, you live on well under $40K per year and have no major plans to increase your expenses. Which, after your pensions, CPP & OAS. You don't need much of that money at all.

    It sounds like your primary goal is to help your children with that money/leave it for them. So I guess you need to think about how you want to do that. Do you want to help them with their initial home prices (which are overwhelming in Toronto) or would you prefer to give it to them later in life? Keep in mind that between you and your spouse you may have another 40 years until you are leaving your own inheritance.

    Also, you seem very set on staying in Toronto, can I ask why? Toronto is a very expensive city that most people move to just to make more money. Since you aren't working, why do you want to live in an expensive but tiny house?

  8. #7
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    Quote Originally Posted by Eclectic12 View Post
    I've seen at my broker in the past, in addition to the usual 1, 2, 3, 4, 5, 6, 7 & 10 year GICs, short term GICs. Ranges have been 0-59 days, 60-89 days, 90-119 days, 120-179 days, 180-269 days and 270-364 days. I believe I have also seen cashable GICs as well.
    You're right. At Scotia iTrade I see a collection of 6 month GICs and also cashable GICs. Add in the multi issuer HISA names and you can probably comfortably do 1.5M with CDIC insurance which is pretty amazing within one account.

    Going back to the OP ... who as I understand, has not received an inheritance yet but is thinking ahead...

    It sounds like this inheritance could enhance your income but you won't have to draw massive amounts of money out of this. This is a really sweet position to be in. Let's say you receive 2M. Only strategy would be to split it into two piles.

    Pile A (perhaps 500K). Short term needs such as big expenses you anticipate, lump sums. You can effectively leave this money in GICs and high interest savings accounts. This will grow, a bit, be super-safe and you can withdraw the amounts whenever you want.

    Pile B (perhaps 1.5M). The capital. This might be appropriate for stock investments. One thing about Canadian taxes that is quite interesting is the extremely favourable treatment of "eligible dividends". If you put the 1.5M into iShares XIU for example, it will spin off at least 35K of annual income -- automatically -- for the rest of your life and without depleting the pile of capital. Additionally, that income is taxed at an extremely low rate.

    One idea to ponder: With 1.5M in XIU, you could retire and receive an automatic annual dividend from XIU and will effectively pay zero tax. With 35k income from XIU and 18k pension = 53k annual income, you will pay virtually no tax and won't even have to touch this capital.
    Last edited by james4beach; 2017-03-21 at 02:40 PM.

  9. #8
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    Retire. Invest in a 60% equities 40% fixed income portfolio and withdraw 3% or less of that pile and enjoy life.

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    Quote Originally Posted by Karlhungus View Post
    Retire. Invest in a 60% equities 40% fixed income portfolio and withdraw 3% or less of that pile and enjoy life.
    I was going to say something on the lines of this. Sell your depleted house in Toronto, go live your life (if your kids were old enough) 45k with a toronto property and 3 kids? Was this always the case?

    A few things;
    Top up your Registered account amounts, including setting aside some for kids' RESPs.

    Even with the 2Million in inheritance (assuming all of it is going to you and this is after taxes,fees, etc) you @ a conservative return of 3.5% can net you nearly 70k per year.

    another; renovations in the house, would it be absolutely necessary for you to do this? even if you wanted to sell are the renos required?
    if not, sell as it is, let these rich foreigners pay you, take their money taxed free (if principal residence for entire time) and move to a cheaper area and you will have an additional sum to add. (only if you can do this i.e kids would have to transfer schools, depending on your 19 year old where he lives)

    finally; it may be worth looking at speaking to a fee only planner who will help some planning strategies.

    actually real finally; you need to talk to your wife about what you want to do for the remaining years of your life. personally it seems as though you have worked hard and made due and I would recommend some nice relaxing time to live your life!

  11. #10
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    Quote Originally Posted by james4beach View Post
    ... One idea to ponder: With 1.5M in XIU, you could retire and receive an automatic annual dividend from XIU and will effectively pay zero tax. With 35k income from XIU ... you will pay virtually no tax and won't even have to touch this capital.
    James, are you ok? No headache or fever I hope.

    Last edited by OnlyMyOpinion; 2017-03-21 at 07:31 PM.

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