Strategies to help you prepare for a financial windfall

Carmela Guerriero:

We’re about to witness the largest generational wealth transfer in history, with Canadian baby boomers set to pass down billions of inheritance over the next decade. While not everyone will inherit wealth, receiving a windfall can come in many different forms—whether it’s selling your business, cashing in on real estate, or even winning the lottery. Whatever way your sudden wealth comes from, the decisions you make in those first few moments are absolutely critical.

Hello, I’m Carmela Guerriero, and welcome to RBC Wealth Management Canada’s Matters Beyond Wealth. With me today is Tony Maiorino, Vice President and Director, Head of RBC Family Office Services at RBC Wealth Management Canada. Tony leads a team of over 200 professionals with legal, tax, and financial planning expertise.

Tony, thanks for being here. We’re excited to have you. Today, we will explore the many considerations when acquiring sudden wealth from an inheritance, selling a business, or hitting the lottery jackpot, and why this really matters [beyond wealth].

Tony Maiorino:

Thank you, Carmela. It’s a pleasure to join you today.

Carmela Guerriero:

So, to start things off, Tony, how would you define a financial windfall? And what makes managing sudden wealth different from the traditional path of gradually accumulating wealth?

Tony Maiorino:

Yeah, anytime an individual receives a large sum of money that is unexpected or, or even expected, but the date of that money coming in is unknown, that’s really what adds to the complexity relative to growing your wealth over time. When you’re growing your wealth over time, you have the ability to see it growing, you’re vested in its accumulation, and it certainly gives you pause before perhaps you use that money for something.

So, juxtapose that with when you receive a windfall, it’s unexpected, even if you knew it was coming, such as an inheritance, but the timing of it is unknown. When it comes, it hits you, you could be at a different stage of life than you originally thought, you could be more or less in debt. So, the complexities around receiving a windfall, you know, certainly make it a lot more complex than when you’ve grown that wealth yourself.

Carmela Guerriero:

You know, many people’s first instinct after receiving an unexpected windfall is to start making financial moves—paying off debt, investing, making big purchases, maybe even sharing with other family members. But before spending a singular dollar, what steps should someone take to make sure their windfall is actually theirs to keep?

Tony Maiorino:

Yeah, that’s a great, great point. I think a lot of times when a windfall is received, people immediately start thinking about how they can deploy those monies. And, you know, maybe it’s paying off debt, as you mentioned, or purchasing a second property or things of that nature. You know, I think first and foremost, we would recommend clients pause.

You’ve talked about, is that money actually theirs to keep? Is that windfall at all taxable to them? Are there other individuals who might potentially have a claim in that windfall?

Generally speaking, we would say, when you receive a windfall, take a pause, have a real discussion with your family around. “Okay, we’ve received this money” (however you’ve got it) “And how do we want to use it? What is the best thing for our family today?”

Sometimes that can be:

• Paying off debt.
• Other times that might be buying that cottage you’ve always wanted.
• Or looking at investing that money into your retirement. 
• Or today, something we see quite a bit is helping to support you know,
  • children may be purchasing that first house making that down payment.
  • Or helping to pay off student debt.

So, I think our advice, generally speaking, is take a pause, have a look at the landscape and have conversations with your family about what is the best way that you can utilize these funds. That could be just with your spouse or with that extended family.

Carmela Guerriero:

I love this idea of “pause.” I love that, you know, taking a pause, you know, having a family discussion to help define and articulate a family’s financial objectives is really, really smart. But I love the word pause. It’s such a great way to say, let’s just take a break and see what’s best for our family. So, thank you for that.

One of the biggest surprises for Canadians receiving an unexpected fortune is that different types of windfalls come with different tax implications. So, I have two questions for you. Can you share with us, how does the Canadian tax system treat inheritances, business sales, and lottery winnings? And what are some of the common mistakes that people should avoid?

Tony Maiorino:

Well, if I can, maybe I’ll deal with the second one first, and then we can jump into that first one. I think one of the most common mistakes that people make ties actually to our last conversation, which is not pausing, you know, understanding exactly what the tax implications are of the windfall you received is really step one.

A great example of this is when you receive an inheritance, you know, making sure that, as an example, you’ve got the estate has the CRA clearance. As a beneficiary of those funds, you want to be sure that those monies are yours and aren’t going to be subject to some sort of claim from a tax perspective, or even another beneficiary. And this can come from estates not being probated, where perhaps another beneficiary comes out of the woodwork at some point down the road, and there’s now a claim against the estate.

So, the first thing we say goes back to that pause, look into it, make sure it’s exactly what you think that it is. So, understanding what the implications are of the money you’ve received. As far as how things are treated,

• an inheritance that’s received by the beneficiary is tax free. The tax has been paid by the estate, and the beneficiary receives those funds, and that’s their funds. They’ll pay tax on the money that that money makes.
  • So, if they receive a dollar from an estate, and that dollar earns a dollar, then they pay tax on that dollar of earnings, but the original capital is distributed to that beneficiary tax free.
• The same applies to lottery winnings from registered lotteries.
  • So, if you receive a lotto max jackpot, as an example, the proceeds that you receive from the Ontario Lottery Corporation or the corporation that you’re getting those winnings from, those winnings are tax free to you and you’ll pay tax only on the income that is derived from those winnings.

When you’re talking about the sale of an asset, whether that be a business or a property or things of that nature, then different tax applies to those items. Typically, when you think of a business or a property, we think of the capital gains tax. So that capital gains tax would be applied, and it would be owed to CRA and the net proceeds would be what you would have available to you to then meet your personal financial goals post paying CRA.

But I really, I can’t emphasize enough going back to that pause. Understanding how you receive these monies and has the tax that needs to be paid been paid if there is tax, and then if it hasn’t been paid, making sure to set that aside to cover those liabilities.

Carmela Guerriero:

Thanks, Tony. It sounds definitely like an unexpected windfall can certainly have lots of tax burdens if we’re not pausing to figure that all out. So, thanks again for that great keyword.

Another scenario people might face to receive a windfall is pressure from family and friends. There may be this underlying expectation to share and that can be difficult to navigate. What’s your advice for handling those initial conversations?

Tony Maiorino:

Yeah, here’s another example of where we see a difference in behaviour when an individual gets a windfall through as an example, a lottery—just to use that—that’s information that’s made public, your name is put in the paper, and it’s available to everybody. So certainly, there is a broader amount of focus on the fact that you’ve received these funds. So, you’re going to be receiving requests for money from people that you know, people that you know very well, family, friends. You’re also going to be receiving requests from people that you don’t know, you’re going to become potentially a target for fraudsters, you’re going to become a target for individuals looking to take advantage of the fact that you’ve received these funds.

So really, really important when you are in a situation where you’re receiving a windfall that is going to be public knowledge, again, that you really steel yourself and your family. Sort of close in circles amongst yourselves to talk about, what are your priorities—charitable giving is a great way to give back, but what are the priorities for the family? What are the priorities around supporting the family?

I know some of the best conversations that my wife and I have are, “Oh my gosh, if we won the 75 million, what would we do? Who could we help? How would we make people’s lives better? How would our lives change?” So really taking that conversation that you have in the imagination stage, and really bringing it into the real-world stage to say, “Okay, what are the things we want to do? Who do we want to help?” And then really closing ranks around the family to make sure that you’re comfortable in that support.

When it relates to businesses, or the sale of a business or an inheritance, oddly enough, these are things that are not broadly public. Your close friends and family might know that you’ve inherited some money, but they probably don’t know exactly how much unless they go and, as an example, pull the probated Will.

And it’s the same thing when you sell your business, those are things that aren’t generally publicly available. So, there’s a lot less pressure from an external perspective, you may still have that from an internal family and friends, but certainly it’s a degree less when you’re dealing with an inheritance or the sale of a big asset, whether that’s a business or a secondary property or things of that nature.

So, again, the same advice applies as to the lottery windfall. I just think you’re going to expect a little more pressure from external sources on that lottery than you are from that inheritance, or the sale of business, because it’s not as broadly known and people also look at it differently. You’ve earned the money that you received from the sale of your business, or your family earned the right to transition that wealth to you. Versus a lottery winning is just a sudden influx of a large amount of money from a ticket that you bought. People tend to look at that a little differently than the first two.

Carmela Guerriero:

So, taking your thought around setting priorities, as you just discussed, I can imagine one of the biggest challenges is balancing immediate needs and desires with long-term security. So, what’s your recommendation to help someone in this situation decide what portion to spend, what to save, and what to invest?

Tony Maiorino:

Yeah, I like to say to clients that money can solve a lot of problems. But money for every problem that it solves, it has the potential to create new problems. And so our view on this is nothing beats planning. If I were to—using myself as an example—if I were to suddenly come into a very large sum of money, the first thing that I would do is build that influx into my long-term financial plan:

• What does this mean for my requirements for savings?
• What does this mean relative to my retirement?
• What does this mean relative to me achieving my goals?
• Or the things that I need to do versus the things that I want to do?
• How does this change my family’s ability to meet the goals that we’ve set out as a family?

So planning is absolutely first and foremost. Before deciding what to spend, what to save or what to give, understanding how that sum of money impacts your family’s life, it’s really going to help put some clear brackets around, “Okay, this is really what I need, and now I’ve got this pool of capital.” That is, money is never surplus, because we really, we don’t know how long we’re going to live, we don’t know how much money we’re going to need in retirement, we know that retiring at home and growing old at home is not inexpensive. And so, you don’t know how much you’re going to need. But with a good financial plan, you can really identify the amount of money at the end, which would really be for transitioning to that next generation.

Once you know that now you can begin to put some guidelines in place around, “Well, what are we going to give to charity? What do I want to see move to that next generation?” Whether that’s children, grandchildren, nieces, nephews, friends, charities. And then, “What is it that I really need to accomplish with the rest of that money?” First and foremost, before you get into how much are we going to save, spend or give, it’s really going through that financial planning exercise.

I’ll end just with this. I think a lot of people think if you get 5 million, 2 million, 10 million or 20 million, “I don’t need to do a financial plan, I have more money than I’m going to need.” The reality is, I think the more you have, the better off you are by doing that plan. It really does help to compartmentalize all of the different components and bring clarity to the conversations you’re having with your family.

Carmela Guerriero:

So, I’m taking away two important words that start with ‘P.’ So, pause and planning. Now I’m going to wait for your third ‘P.’ So far, we’re on a roll here, pause and planning have been key so far, those are my takeaways.

What about those receiving an inheritance? You know, it’s unexpected, could be a large amount. How can pre-planning conversations with loved ones make that transition smoother for someone that’s getting an amount that they don’t know and they don’t know when?

Tony Maiorino:

Yeah, this is unintentional, but it brings me to your fourth ‘P’, since you brought it up, which I think is really about the portfolio. If I’m leaving money to my children, it’s really important for me to have good conversations with them around that portfolio. And you get into as much detail as you feel comfortable having with your child or children. But really, we say to people all the time, before you transfer wealth, transfer knowledge, transfer the family values, because that’s what’s going to help you avoid the shirt sleeves to shirt sleeves in three generations. And the more you’re able to communicate with your children or your beneficiaries, and help them understand, you know, what your goals are for this money and how that money came to be and where it’s from, and they understand the values that went into creating that wealth, that’s really going to pay dividends for them when they receive that wealth.

Oftentimes, money that transitions from one generation to the next can be viewed as a gift, or it can be viewed as just it’s extra money. And I think having those conversations around, “We had to work hard to earn this money, here’s what this money can do for us as a family,” and “This is how we were able to take those vacations.” “This is why we did these things,” can really help to transfer that knowledge of how that money was created to that next generation. So that there is that level of understanding that this isn’t found money, it’s not free money. We want you to use it, want you to benefit from it. But we also want there to be an understanding of how that money was created. So good conversations typically lead to good outcomes.

And so the more you can help your family understand the wealth that exists, you know, the better the outcomes are going to be for them. The only other thing I would say is, I think it’s important as well to consider the timing of that transfer of wealth. I know, in my own experience, my mother really enjoyed giving small sums of money while she was alive to the grandchildren and her children to actually see them enjoy it.

And so, I think you have to look at does that work for you? And is that the right thing to do? And have those conversations. You know, that can also turn a very large windfall at the end into maybe a slightly smaller windfall, where you’ve been able to help along the way with key objectives, like paying down student loans or buying a home, or, you know, supporting grandchildren in doing the things that they might want to do.

Again, keeping in mind that the plan is your plan, and it’s for your money in your life. If you have the ability to do these things, then fantastic. But if you don’t, it’s totally fine to have that just be part of the estate plan and just make sure they understand what’s coming and all of those other things that are important to you.

Carmela Guerriero:

Okay, so we’ve got pause, we’ve got planning, we’ve got portfolio. I love the idea, if you can, to sit down and have open dialogues with your family and keep everyone sort of in the loop of what’s expecting. I think the more we can mitigate unknowns is always good. Those will always result, as you say, in good outcomes.

So, Tony, if you hope listeners remember one thing from this conversation today, what would that be?

Tony Maiorino:

Wow, one thing. You know, I would say sometimes talking about money can be really complex, it creates emotions in people. Money is a difficult thing, but I would definitely say, focusing on having those conversations in advance can really be a way to number one, for you to understand what your children are thinking, your family members, your friends, whoever is receiving some of these funds. If we’re talking specifically about estate transfer, you know, having those conversations is really important, again, to the degree that you feel comfortable in doing so.

Then the other thing I would say would be the pause. There’s no rush. If you’ve received a windfall that money will be there for you in an hour, in a week, in a month. So, if it takes you a couple of months to figure out the plan to move forward, the amount of opportunity lost by waiting that time is going to pale in comparison to the potential loss of making an error. And so, we would say, just pause, take a moment, understand what it is that you’re looking to do, understand where the money comes from and what the implications are of that. You can always move forward in a week, in a month, in two months, but that pause is really, really important.

Carmela Guerriero:

Thanks, Tony. These are great nuggets of wisdom. Thank you so much for joining me today to help those fortunate enough better prepare for a financial windfall and why this matters beyond wealth.

Tony Maiorino:

Thank you very much, Carmela. It was a pleasure to be here.

Carmela Guerriero:

You can find out more about Tony Maiorino on LinkedIn or at rbcwealthmanagement.com.

If you enjoyed this episode and you’d like to support the podcast, please share it with others, post about it on social media, or leave a rating and review.

Until next time, I’m Carmela Guerrierostanding in for Leanne Kaufman. Thank you for joining us.

Outro speaker:

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