Inheritance - Advice on my investment plan

[brew]

Long story short, I came into an inheritance. Between cash and real estate it is approx. $225,000. I am also in trust with the other half for someone else. Half of their portion will be given to them in 5 years, the other half in 10 years. (same amount - So total I am in control of is approx $450,000). I have a rough plan and a few questions.

First my situation:
Salary is $43k + some overtime make it approx 50k. Co-op contract until Sept 2013. After which I have several options that I am undecided between (back to school, full time position with my current company or opening a business)
Living common law in a rented apartment - $1050/month split 50/50 with my girlfriend.
Debt is $20k to OSAP that I don't have to make any payments on yet because I am on a co-op work term.
No other debts. No assets worth mentioning. No savings worth mentioning.
My other expenses are quite reasonable, I have a cheap car with a very short commute to work, a cell phone and home internet.

Now my plans. I haven't done anything yet and am still weighing my options. Currently there is a house and a shared portion of a cottage as part of the inheritance. These will both be sold shortly as they are not something that can benefit us. Cash is about $110,000 and is available now so I can start with my plan as soon as I like, though I am not in a hurry.

For my half:
-First off is to buy a house, renting is throwing money away. I have read briefly about CMHC fees and have decided it would be best to put 20% down to avoid the extra cost. Let's say the house is $250,000 so 20% is $50,000 down
-Possibly purchase a student rental house - I am in Waterloo and there seems to be a fortune to be made here from the students. There have been some more strict rules put in place in the last year for student rental housing being up to code so that is a major consideration before hand. Assuming I did decide to purchase, at 20% down this would be approx. $50-75,000 down depending on the property I choose
-I want to invest in a couch potato strategy and in the future (after much more reading/learning) do some trading with a small portion of my portfolio. It has always interested me. It looks fun, exciting, educational and (hopefully) profitable.
-Of course leaving some amount of an emergency fund sitting in a savings account.

For the "in trust" half:
-I'm looking at a student rental condo building that is currently being built. They offer complete management for a fee and it still will be cash flow positive. I would of course go into more detail before signing anything, but it looks like a great hands-off investment with a good return for the 10 year portion of this trust money. The unit I'm looking at is $230k with $46,000 down.
-Similar investment strategy to my portion.
-Keep some liquid cash in a savings account just in case.

And my questions:
1) Since I am in trust with half of this money, currently I am keeping it separate from my half for simplicity in the future, I don't want to have any disagreements about how much the investment is worth, etc. Would it be beneficial/more powerful to put the money together?
2) I have no yet looked into getting a mortgage due to how busy I have been lately between work and dealing with the estate - which is finally coming to a close. My employment situation is obviously not ideal because it is a contract. Will this downside be outweighed by the amount of the inheritance?
3) How much cash should I have as an emergency fund? Where do you recommend I keep it saved?
4) Any other investment avenues I should look into to diversify further?

Please let me know if you have any comments/concerns/ideas as this is all new to me.

[marina628]

You may have issues qualifying for all these mortgages on your income.Down payment is just part of it and they use only 50% rental income on the application.Some banks require 35% down on investment properties depending on your situation.I would start with a home for yourself and wait a while until you understand all the other costs of home ownership before you want to jump into being a landlord.

[MoneyGal]

Red flags:

Common-law relationship, with mention of the fact that you are looking for a plan to benefit "us." Is "us" you and your common-law spouse? You are planning to intermingle the inherited funds with a house that you will inhabit with a CLS. Get legal advice and potentially a pre-nup.

"Renting is throwing away money."

"I am in trust with the other half for someone else." I'm not totally sure what this means, but it sounds as though you are the trustee of a relatively large sum which legally belongs to someone else and must be managed by you (if you are the trustee) for their sole benefit. The trust agreement will likely (certainly, actually) set out parameters for how these funds can be invested. You say you are "currently" keeping the funds separate "for simplicity" but you are legally required to hold these funds separately. If you are required to disburse the funds in 5- and 10-year tranches real estate will be a poor choice if it is even permitted by the terms of the trust.

Advice: slow down. I suspect you have a lot of learning to do, and you are in a relatively vulnerable position while also having a high degree of responsibility for money which is not yours.

[humble_pie]

yes there are red flags & unfortunately i cannot see that the OP has sufficient understanding of what has happened & what his legally enforceable responsibilities really are.

it sounds as if OP is the executor & also the trustee of an estate whose testator has, regrettably, recently passed away. OP is not clear as to whether his "half" was bequeathed to him in outright ownership or whether his "half" is also going to be held in the same trust with the "other half" that sounds as if it had been bequeathed to a youngish relative, possibly a sibling.

if half the residue of the estate was bequeathed outright to the OP, this will be clearly stated in the will. In such a case there is no "other" half, because a half-portion of the estate is already in the works to be made over to the OP in outright ownership. The other half-portion will remain in trust as a testamentary trust. It will now become "the residue of the estate."

if the trust benefiary is a young person, presumably he or she would like to have an education. I for one believe that illiquid real estate investments are not appropriate for estates with youthful high-needs beneficiaries.

another issue i'd like to mention is the notion of co-mingling the estate trust funds with the OP's own personal funds received under the inheritance. There is a vast body of law dating back hundreds of years that governs the responsibilities & duties of trustees. Trust assets can *not* be combined with the assets of any other person.

i am hoping the OP will consult a lawyer. He will be astonished to learn what are the duties & responsibilities of the office he has already accepted.

[brew]

Thanks for the responses.

MoneyGal: "Us" was referring to my brother and myself. We have a good relationship and he trusts me with the money and specifically said to me that he does not want any money right now because he has a history of poor choices.

The common-law situation is definitely a concern of mine, I have heard that anything purchased with an inheritance wouldn't be considered half hers in the event of a split. I don't have anything concrete on this and I would have to look into how it's affected if we continue our 50/50 financial path but if I have paid for the downpayment out of the inheritance.

The will was quite short and simple, it says that everything is to be split evenly between us with his half in trust with me. There was no specifics mentioned on what I can and can't do with the money or property. By "trust agreement" were you talking about this or is there a blanket legal way of how anyone in my position has to handle the money?

RE: slow down - I realize now reading my post again that it does seem like I'm rushing into a lot of things but I was trying to give a brief idea of a long term plan. I am quite fine with the money sitting in an account until I have a well thought out plan for it.


Humble_pie: I definitely have a lot of learning to do, hopefully I can learn a lot here.

Yes, I am the executor. My portion was given to me to do with as I wish with no conditions mentioned.

He is 20 and not a fan of education. He hasn't finished his high school yet, I am trying very hard to get him motivated. I have told him that his education is paid for if/when he goes. I definitely have his best interest in mind.

I have a lawyer that knows my family and I have spoken to him about some of the issues but we haven't talked about the money in trust for my brother yet. It sounds like there is a lot more to it that I had anticipated. It's on my to-do list now for sure.

[OhGreatGuru]

I second the advice of MoneyGal & humblepie. The "trust" funds need to be kept separate from your own money; and the investment strategy for them will probably be different than for your own money.

$225k is not enough money for most people to retire on. It seems to me you have too many plans for a modest amount of money.

Buying yourself a home with your inheritance would be a good investment for most people. You will have to decide if you want the responsibilities of home ownership vs. investing the money to provide a revenue stream to pay for renting.

Investing in income properties is a lot riskier. If you want to do that with your own money, that's your prerogative, although I don't recommend it for someone with no experience in property management. But I doubt very much that it would meet the criteria for a "prudent investor" that provincial laws generally require for trusts. And if you mismanage the trust you can be sued by the trust beneficiary later.

Now that significant capital has come into your possession, you need to get a cohabitation agreement. In theory common law spouses don't have automatic rights to an equal share of property, but the law keeps moving in that direction all the time. Certainly you need to sort this out before you buy a house together.

[humble_pie]

this is looking better now, the OP is serious & wants to do a good job.

i'm still puzzled by the lack of compliance with bureaucracy here, though. Weren't there reports to file, such as an inventory of assets, a final tax declaration as of the date of death, etc, as well as releases from the relevant jurisdictions to sell the house & the cottage interest (it sounds as if these are being sold by the undistributed estate.)

i'm left wondering who prepared & submitted these documents on behalf of the executor. Also wondering why that shadowy person is not still on board to guide this estate onwards into its next iteration ? in the next stage, 1) the real estate will have been sold; 2) a fair half of the estate's value will have been made over to the OP in outright ownership; & 3) the remaining half of the estate's assets - mostly cash now, it would appear - will be ready to be invested in the trust for the younger sibling.

brew the common law jurisprudence which governs trustees' conduct is vast. Whole courses in law schools are devoted to it. Lawyers specialize in it. This is why it's been suggested here that you seek legal counsel.

a difficult issue, to my mind, is that there are not enough $$ in this trust - which may be less than $225,000 once the final tax return is filed & paid - to pay for a professional trustee. Trusts afaik are not allowed to make riskier investments. Unfortunately in our times the highly conservative investments they are allowed to make - bonds, preferred shares, some blue chip common shares - are not yielding much. A professional trustee's fee is going to be based on the assets' value, not so much on the income. Often there are minimum fees. It's likely that, in this case, a professional trustee's fee would devour all of the income & possibly even some of the capital, each & every year.

i'm guessing again, but perhaps it is to avoid this unpleasant situation that our OP has been named trustee & why he is willing to shoulder the burden.

brew i am sure you will need some professional guidance at certain stages.

as for how to plan financially: i for one think it would be best if, in your thinking, you split your own outright inheritance completely away from the trust. You can take more risks with your own money. As a trustee bound by the prudent man rule, you cannot take risks in the trust account.

perhaps i could suggest going about things in modules. First, find a professional advisor, preferably a lawyer or accountant, who will agree to be flexible & bill by the hour. The lawyer you already know might be just the ticket.

next, plan the trust investments. These are going to be simple. You could place easily 60-70% in a GIC ladder so as to be able to pay out half the trust assets to your brother in 5 years. The rest of the assets could be invested in 2 or maximum 3 large, basic equity or balanced etfs.

last, plan how you will deploy your own inheritance. This will/should be a little more complicated & challenging.

[Pigzfly]

Red flags:

Common-law relationship, with mention of the fact that you are looking for a plan to benefit "us." Is "us" you and your common-law spouse? You are planning to intermingle the inherited funds with a house that you will inhabit with a CLS. Get legal advice and potentially a pre-nup.

Definitely get legal advice on this! Where I live, the lawyers told us that any attempts at a "pre-nup" giving me no ability to claim any part of the condo my partner purchased, would be thrown out in court. Basically, as the asset was being acquired after we were already common-law, despite signing a pre-nup, I would still be able to go after it. If the asset was brought to the relationship, then the pre-nup would stand a chance at not being thrown out. That said, this may not be in the case in Ontario.

[timelessfinance]

Advice: slow down.

Exactly.

"$1050/month split 50/50 with my girlfriend."

$525 a month to live somewhere is throwing money away? Just wait til you own a house, dude lol.

The TL;DR of your post is "How can I inflate my lifestyle to match my new-found wealth?"

If you invested extremely conservatively and earned just 2.5% after tax (put it into Cdn eligible dividend stocks), you'd be able to pay your rent without touching your salary. Realistically, you could fund your entire lifestyle with a modest improvement in returns, if it's equally cheap.

The proposed investment strategy is devastatingly centralized on real estate. There are other asset classes. Heck, instead of dealing with tenant BS, put a portion of your money into high-yielding REITs. None of the work, most of the cash flow.

You have a golden opportunity -- to literally be financially independent at an extremely young age. You could live off the income from your capital and bank your salary. Max out your TFSAs and RRSPs every year, use your taxable investments to buy more low-tax dividend stocks; it could be an asset spiral instead of the debt spiral that most Canadians are in.

[groceryalerts]

Exactly.

"$1050/month split 50/50 with my girlfriend."

$525 a month to live somewhere is throwing money away? Just wait til you own a house, dude lol.

The TL;DR of your post is "How can I inflate my lifestyle to match my new-found wealth?"

If you invested extremely conservatively and earned just 2.5% after tax (put it into Cdn eligible dividend stocks), you'd be able to pay your rent without touching your salary. Realistically, you could fund your entire lifestyle with a modest improvement in returns, if it's equally cheap.

The proposed investment strategy is devastatingly centralized on real estate. There are other asset classes. Heck, instead of dealing with tenant BS, put a portion of your money into high-yielding REITs. None of the work, most of the cash flow.

You have a golden opportunity -- to literally be financially independent at an extremely young age. You could live off the income from your capital and bank your salary. Max out your TFSAs and RRSPs every year, use your taxable investments to buy more low-tax dividend stocks; it could be an asset spiral instead of the debt spiral that most Canadians are in.

This is a different strategy but keep in mind of potential investing opportunities on the horizon. I would keep renting until you can plan more for the future (getting married or moving for work).