What to do with a monetary advance on your inheritance

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Q. My amazing parents are downsizing and have decided to gift my husband and me $200,000. It’s nice for us but leaves me with a lot of questions. My husband and I are 37 years old and have been happily married for 15 years. We have no credit card debt, and just $12,000 on a credit line we used for renovations last fall. Our home is worth $800,000 and we have a mortgage of $214,000 at 2.9%. We have a gross annual household income of $150,000, defined benefit pensions with our employers, and invest decent amounts in TFSAs, RRSPs and RESPs for our two young kids through automated monthly deposits—though nowhere near the limits. We also donate $5,000 annually to charity. My husband would love for us to pay off the mortgage this December with the gift money but I’m only 75% convinced. This has been a huge year of change for us, and more change may come in the next year depending on my job situation. We may move houses (to lessen my commute). Am I being silly to put all of our money into a matrimonial home? Anything in life can happen, even when we would never expect it. I am very sure paying off the credit line is the best idea—but not sure of the best place for the rest of the money. Any help to clear up my confusion would be appreciated. — Maureen A. The kind of gift your parents have offered is effectively an advance on your future inheritance, and I think there is something to be said about parents considering this—in the right circumstances. If we ignore the family law implications for a minute, I would agree the line of credit would be the first thing to pay off. No doubt it is at a higher interest rate than your mortgage and can be paid off without any restrictions. The balance is also small relative to the gift. Given you both have defined benefit (DB) pensions, I suspect you won’t have much Registered Retirement Savings Plan (RRSP) room. Like all DB pension plan members, you and your husband will have a Pension Adjustment (PA) that reduces your RRSP room, so you don’t have an RRSP advantage over non-DB pension plan members. Registered Education Savings Plans (RESPs) have lifetime limits of $50,000 per beneficiary, so could use some of your parents’ gift to max out your children’s RESP(s). I don’t think I would, though, because if you assume a modest rate of return, you would likely be better off making annual contributions (generally $2,500 per child) to get the maximum annual government grants. You have a low mortgage rate and lots of home equity. If you have a moderate to high risk tolerance, I think contributions to a Tax Free Savings Account (TFSA)* could be a good option. If you have a low to moderate risk tolerance, that would cause me to lean more towards recommending you use the gift to repay debt. Before making any moves, confirm what the penalty would be to pay out your home mortgage. It may cost you less to make the maximum annual prepayment before and after the next anniversary date of the mortgage without penalty, and then increasing your monthly payments as much as you can in the meantime. Depending on the details of your potential move to a new house—if it would require a much larger mortgage, for example—that could be a vote in favour of debt repayment over investing. The neat thing about TFSA contributions, if you’re comfortable with that option, is you can contribute and then decide to take withdrawals at some point in the future, without any penalty, to pay a lump sum against your mortgage. Or make your annual RESP or RRSP contribution. TFSA contributions may provide the most flexibility, Maureen. If I read between the lines, I think you’re asking about the family law implications of this gift, as well. In Ontario, a matrimonial home is generally subject to equal division in the event of a marriage breakdown. Using a gift like this to pay down your mortgage could put 50 percent of “your” family money at risk. I’m not a family lawyer, and you should consider consulting a family lawyer for family law issues. But I can tell you that this isn’t an easy situation to navigate. Some financial options: Your parents could consider lending you the $200,000, even if it’s at 0% interest, to protect the initial $200,000. This would be a debt owed by both of you back to them in the event of a marriage breakdown, rather than $200,000 in additional home equity to be divided with your husband if you were to split (putting $100,000 of the gift at risk). Another option is to keep the gift clearly identifiable as “your money.” You could do so by placing the gift in a separate account, or by investing in your existing RRSP or TFSA accounts and buying an investment or investments that are clearly identifiable. The problem with this is that you may well change your investments over time or take withdrawals at some point, blurring the line between the gift and your shared finances. So, you could consider opening separate RRSP or TFSA accounts*, again, to distinguish this family gift money from other savings you and your husband have accumulated together. Finally, you could choose to enter into a contract to account for the gift, but this is a very formal and explicit way to address your concerns. I recommend you seek out legal, tax or other professional advice to help you make your choices with more certainty. Family gifts and inheritances can be tricky, given the high rate of divorce. Dealing with them can be awkward, and carries the risk of hurting your spouse’s feelings. Sometimes you just need to talk these things out.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.