Receiving an inheritance?
Australia is on the cusp of an inheritance boom. In fact, we’re already riding the early waves of it driven in part by the Baby Boomer generation (born between 1946 and 1964) who have begun leaving behind large inheritances to their children. According to a study on wealth transfers by the Productivity Commission, ‘Boomers’ are expected to pass on an estimated $224 billion each year in inheritance by 2050, adding up to about $3.5 trillion in assets. Wow!
What is Considered a Large Inheritance?
The Productivity Commission’s report showed that in 2021, the average inheritance in Australia was around $150,000. That’s a large amount of money, but as financial advisers working with clients who receive inheritances of significant scale, we find more often than not that number has increased.
Today in Australia a large inheritance would be a million dollars and above. Anyone who receives that kind of financial windfall should be seeking financial advice. If you’ve received an inheritance or expect to in the near future, whether it’s a life-changing sum or not, here’s why you should get financial advice, and what to expect when you do.
Why You Should Seek Financial Advice on Inheritance?
Inheriting a substantial amount of wealth can be overwhelming. If you’re not experienced with large sums of money, you’re at risk of making rash decisions like blowing it on a new car, making bad investment decisions, or worse, getting scammed.
Will You Have to Pay Tax on Inheritance Money?
When we meet with clients seeking financial advice on inheritances, common questions arise around whether inheritance counts as income and if you have to pay tax on the inheritance.
While tax law is a complex beast, the short (but not so helpful answer) is that it depends on what types of assets you’ve inherited, when they were first acquired and what they were used for, among other things.
For example, if you’re inheriting property from parents, and that property was used as an investment property, when you sell it, the estate may be subject to capital gains tax (CGT). If the property you inherit was your parents’ primary place of residence (PPOR) however, it’s likely to be exempt from CGT, provided you don’t rent it out before you decide to sell it and it is sold in a prescribed short number of years (generally two).
Received a Windfall?
Here’s How to Manage Your Inheritance:
Ok, so if you’ve read this far, you’ve probably received some money from a loved one or you will in the near future. Here’s a step-by-step guide on what to do with an inheritance.
1. GET FINANCIALLY EDUCATED
Without the necessary financial literacy to manage your inheritance, you’re at risk of making bad decisions.
2. SEEK FINANCIAL ADVICE
Even if you’re financially literate and have experience investing, when larger sums of money and assets are involved, handling things on your own can lead to missed opportunities and potential tax pitfalls. The broad types of strategies we would consider for our clients include but are not limited to:
Debt reduction
Superannuation investments
Financial assistance for children and grandchildren
Investment planning
3. DON’T BLOW IT
Overspending and succumbing to ‘lifestyle inflation’ is easy to do. Resist the urge to make impulsive purchases by having a solid financial plan with clear goals.
4. DON’T FORGET ABOUT THE TAX MAN
Ignoring tax implications of receiving an inheritance can result in unnecessary tax burdens and reduce your inheritance.
5. GET A WILL AND ESTATE PLAN
Chances are if you received an inheritance you’ve got some experience with the Wills, Estate Planning and Probate process. So you’ll know that regardless of the size of the inheritance this is important to do due to the change in circumstances for the family.
6. SURROUND YOURSELF WITH PEOPLE YOU TRUST
Not having appropriate and trusted people around you can put your wealth at risk. A trusted family member or friend alongside a financial adviser is ideal. Be mindful of people who may come into your life after finding out about your windfall.
If you find yourself needing advice on this topic, please don’t hesitate to get in touch.