Many parents make the common mistake of leaving their children with way too much inheritance all at once. Many children will spend their inheritance unwisely because they haven’t learned how to handle such a large windfall. What parents should do instead is pass down the inheritance gradually throughout the later years of their lives to minimize taxation, and maximize economic utility.
This is a bigger deal than most people realize. A study from MIT looked at U.S. senior citizens and discovered that unmarried older individuals had a median net worth of $165,000 a year before they died. And for continuously married seniors it was $600,000 before they died. This means that the majority of elderly people die with some amount of inheritance to pass on. The median inheritance in Canada most people can expect is usually over $200,000.
Estate tax rates in the U.S. vary depending on location and inheritance amount as there could be a maximum exemption threshold. In Canada, we don’t have an inheritance tax 😀 but we do have to pay taxes on a deemed disposition. Some provinces also charge probate fees of as much as 1.5% on the value of the estate. Here are some reasons why gradually passing down an inheritance earlier may be better.