The okay Boomer eye roll movement came out of frustration that Australia’s wealth is disproportionately distributed to those over 60, with the sharp rise in property prices being the primary culprit. But whilst we’re all living longer, science hasn’t yet found a way to grant us eternal lives, and so eventually that wealth will be transferred down to subsequent generations.
Receiving an inheritance can be financially life altering. Having helped clients manage their inheritances over many years, here are 10 essential things to consider upon receiving an inheritance.
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1. There’s no rush
Often receiving an inheritance has some emotional baggage attached to it. In almost all cases there is no harm at all in waiting 6 or 12 months before deciding your plan of attack.
2. Seek advice
When you do start to feel ready, it is important that you develop a coherent plan that finds the right balance between securing your long-term future and having some short-term enjoyment. The best way to do this is to sit down with your financial advisor. Receiving an inheritance is usually a single experience in your lifetime, however any experienced financial advisor likely helps people with this scenario multiple times each year. It makes sense for you to leverage their experience and avoid unnecessary pitfalls.
Working with your advisor also has the benefit of addressing the constant challenge we all face, we don’t know what we don’t know. We all have blind spots, and an independent third party, particularly one who understands your broader life goals, can be invaluable in helping you construct a plan that makes the most of the potential you have been granted.
As part of your plan, tax will be an important consideration. Fortunately, here in Australia we don’t have estate taxes, however there will be tax payable on death benefits from superannuation funds. This will have been paid prior to you receiving your inheritance, but it’s something worth being aware of if you are making plans prior to the estate being paid out.
Tax considerations primarily come into play when planning what you then do with your inheritance. An appropriate consideration of Australia’s tax regime is important when developing your plan and another reason why it is important to work with your financial advisor.
3. Start conservatively
It might be that prior to receiving this inheritance you have little experience managing money and investments. If that is the case, consider developing your strategy to be quite conservative at the outset and then as you grow comfortable and confident, your plan can be adjusted and perhaps become more ambitious a little down the road.
It’s never the case that a financial plan is set in stone. I find a good approach can be to have a first step, and then we refine over subsequent years. That recognition of an evolving plan is helpful in overcoming a feeling of paralysis too, a feeling that you can’t afford to get this wrong. Better to invest in a low risk, conservative fashion, and then with more time and greater clarity on your future, build out your plan in future years.
4. Pay off debts
Paying down debts can be a common initial approach upon receiving an inheritance, in particular where you have high interest debts such as credit cards or personal loans. What you certainly should look to avoid is taking on new debt for things like car loans. An inheritance should enhance your financial position, not make it worse.
5. Take out the binoculars
Understanding the long-term implications of your investment strategy is very important and can provide you with considerable insight. Have your financial advisor run some long-term modelling, so you can see how your decisions today will play out 10, 20 and 30 years from now. This relates back to that balancing act between long term financial security and short-term happiness. If the projections indicate for instance that your wealth later in life will be far in excess of your needs, you may elect to pass some of the inheritance onto your children. If your children are at a phase in life where they have young families and a large mortgage, it’s likely that receiving some money now will have a far more significant impact than them receiving it in 30 years’ time when you pass away.
6. Be open to fresh ideas
Sometimes I have people come in with a blinkered view on what they must do. For instance they will say “my father only invested in property, so that’s what I should do with this inheritance too.” Or “I’ve heard that shares are risky so I only want to invest my money in the bank.”
Sit down with your financial advisor with an open mind. Explain what it is you want out of life and what you want this money to achieve. Then be open about the range of solutions but they might propose. Rarely is it the case that a single solution is the right answer. Most commonly there will be some sort of mix, for instance the use of superannuation, various forms of investment, and perhaps even different ownership structures.
7. You can have shades of grey
Another thing I find people often don’t consider is that you need not make a binary choice between enjoying the money now, or the delayed gratification of investing for your future. Most investments produce some form of income. Therefore, it could be that some portion of your inheritance is invested in such a way that it generates income for you today, whilst still growing over time and providing you with that long term financial security that is so important. A share portfolio or a debt free investment property are examples of how this might be achieved.
8. Invest in yourself?
One interesting way that you might choose to use your inheritance is to invest in yourself. Perhaps this windfall provides you with the opportunity to go back to some studies and retrain for a new career. Our ability to earn an income can be our greatest asset, but sometimes with a mortgage and a family it can be difficult to find the opportunities to make sensible investments into our own skills and knowledge. The important thing here is to consider this expenditure an investment, which it really is. There’s no need to feel guilty.
9. Review your will
Writing a will and getting our estate planning in order can be something that’s easy to put off. It may be that prior to this inheritance you didn’t have significant assets and so the importance of a will was not paramount. This inheritance however changes things, and so it’s important that you get your estate planning arrangements appropriately documented. Dying without a will creates an enormous burden on the next generation, and will see a lot of the wealth you leave behind wasted in legal expenses.
Finally, consider whether philanthropy should form a part of your financial plan. I’ve been involved in a couple of instances where the receiver of an inheritance has made a charitable contribution in memory of their late relative. I think this is a wonderful idea and it can be a great way for you to handle the emotional challenges that can be attached to receiving an inheritance.
In summary then, the 10 essential things upon receiving an inheritance are:
- There’s no rush
- Seek advice
- Start conservative
- Pay off debts
- Take out the binoculars
- Be open to fresh ideas
- You can have shades of grey
- Invest in yourself?
- Review your will
Inheritance taxes in Australia
Before I sign off, it’s worth addressing one question that comes up often – are there inheritance taxes in Australia? Although inheritance or estate taxes exist in most developed countries, Australia does not have these taxes.
Despite this, there are still two ways the Australian Tax office can gain from you receiving an inheritance:
- Taxes may be applied to superannuation benefits paid out to adult children.
- Where assets are sold as part of finalising an estate, capital gains tax will become assessable.
Even allowing for these elements, when it comes to dealing with your inheritance in Australia, taxes will not be a significant issue to worry about. Any tax payable will typically be sorted out prior to you receiving any money.
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