Planning on Leaving an Inheritance? Getting it Right Starts Now

We all aspire to make good things happen in our lives, and, to a large extent, this is fueled by our underlying financial well-being. Building enough wealth to provide the best life for ourselves and our families has been a primary goal since Noah was a boy. And when it all comes together, the natural progression includes leaving something behind for those who mean the most.

So, considering these cultural norms, our ageing population and a range of economic and policy factors, it’s no surprise that inheritance is a major part of Australia’s massive inter-generational wealth transfer.

How to Manage Inheritance

Nobody said it was easy. History, and our law courts, suggests that when it comes to mapping your plans for inheritance, there’s so much more to consider than simply making sure you’ve got your Will done. Inheritance, as part of an effective estate plan, is traditionally defined as getting “the right money to the right people at the right time”. But that’s much easier said than done. Let’s start by considering two key steps:

• What does my ideal transfer of wealth look like? i.e., who should get what and when?
• What do I need to do to make sure that actually happens? i.e., you need to get all your legal and taxation ducks in a tight row.

The Facts of Wills, Inheritances and Australia’s Massive Inter-generational Wealth Transfers

According to the Productivity Commission, wealth transfers are large and growing larger. In fact, over $120 billion was passed on in 2018, more than double that in 2002, and inheritance accounts for around 90% of all transfers. The sobering and sad side to this is that it’s often plagued with anguish, broken family relationships, lost aspirations and best intentions thrown out the window.

The NSW Trustee & Guardian service estimates that 45% of adults and more than 60% of parents with young children don't have a Will. Even with a Will in place, in Victoria, State Trustees suggest that one Will in four ends up in dispute. Yikes!

According to Core Data (2020), 74% of contested Wills are successful and 86% of claims are brought by immediate family. It can take over 12 months for a case to be heard in court and, usually, the legal expenses of both parties are funded from the estate. With forethought, sound advice and professional support, much of this can be avoided, your parting wishes can be a reality, and the wealth you worked hard to build won’t end up in a lawyer’s pocket.

How To Ensure Your Will is Honoured

Take these steps when planning your estate and your ideal outcomes are a lot more likely to happen. Need help along the way? That’s what we’re here for.

Step 1: Map Your Ideal Inheritance Outcome

Start by considering what your ideal outcome looks like. Who do you want to give your money to? What do you want to see it used for? Do you want a say in it or should that be the choice of the recipients? When should they get it? When do they ‘need’ it? So many questions; only you have the answers.

Traditionally, an inheritance is whatever happens to be left over when you pass on. Clearly, the primary concern should be to reserve how much is required to provide you the lifestyle and goal realisation that you want and have worked towards. Beyond this, you have the privilege and pleasure of directing any surplus funds to your preferred recipients wherever and whenever you see fit.

An emerging and often unthought-of consideration is to make some or all of these amounts available to the intended recipients well before you move on to the afterlife. Imagine the joy and satisfaction in seeing the impact and difference that your hard-earned funds can have for the people and causes that are dear to you.

The Productivity Commission report noted that, “By the time people receive inheritances, they’ll usually be well into middle age – about 50 years old on average. This limits the impact inheritances have on opening up lifetime choices and opportunities about career and family.” Whilst we await the invention of immortality, there’s no reason you can’t enjoy the process of mapping and implementing a well-planned and optimised legacy.

Step 2: Managing Your Inheritance the Right Way

You’ve created the vision for your inheritance and you’re already mulling the happiness and opportunity it will bring you and your beneficiaries. Your job now is to make sure it’s watertight. Here’s what you need to consider:

• Am I giving my inheritance to the right people in the right proportions, in the right way and at the right time?
• What formal and legal instruments do I need in play to ensure that it actually comes to pass, whether that be before or after my passing?
• Have I taken the right steps to avoid or minimise potential tax implications?

How to Decide Who To Leave Your Inheritance To

The above considerations are complex and fraught with peril. If pondering those questions is giving you a headache, here’s where to start.

Managing inheritance – Who, how and when?

All too often, there is an unexpected miss-match between your ideas for a gratifying inheritance plan and what your potential recipients consider to be fair and reasonable. This is absolutely where the pain and grief sets in.

If you’ve built up a great family business and one of your kids has worked within it at reduced wages whilst another has sought fame and fortune elsewhere, how do you divide this asset equitably? If you’ve blended families and kids from past relationships, how do you keep everything fair? Should you focus on the grandkids rather than your older kids? What if one child has given you four grandkids whilst another has or is planning only one or none?

Modern family relationships can be complex and without careful planning and the right tools in play, there's a good chance that your estate won’t end up where you would like. Without talking numbers, it’s a very good idea to communicate your intentions to family members ahead of time. Our advisors can help you navigate these challenges. If there’s awareness and understanding of your plans, the grief of disputation and litigation can be avoided.

Etch your inheritance plans in stone

Making your inheritance plan stick is mostly about getting the legalities right. If you have complex affairs, blended families or a lot at stake, a will kit from the post office won’t cut it. What’s more, the rules vary from state to state and depend upon whether your assets are flowing from trusts, super or your personal name. On top of all this legal complexity is the old adage that “where there’s a Will… there’s a disgruntled relative”. At BlueRock, our financial advisors and estate planning experts work closely with our lawyers to ensure your Will is water tight. Remember, one in four Wills are contested.

The biggest and best start is to give it good thought, communicate intentions and manage expectations ahead of time. ‘Good thought’ includes making sure your plans are fair, not just in your eyes but in the eyes of potential recipients.

Even though it’s your money and you should be able to “do whatever I damn-well want with it”, the law doesn’t always see it that way. The courts are increasingly looking to ‘duties of care’ and equity. It may not matter that you’re no longer on speaking terms with one of your kids or ex-partner, or if you think the lost dog’s home needs the money more than your kids. If there is a genuine question around the ‘fairness’ of your inheritance plan, it can be contested.

It takes much more time and money to sort out a legal and financial mess than to get your inheritance plan right in the first place. On top of that, lasting damage is done to family and personal relationships.

Avoid Death Taxes

Australia doesn’t actually have “death taxes” but there are two key areas where taxes can take a fair chunk of your inheritance assets.

The first is capital gains tax (CGT). Recipients of your treasured possessions will, more often than not, want to sell to fund their own plans and aspirations, despite your sentimentality. Often, an asset needs to be sold so it can be shared across multiple parties. There are ways to manage this and a couple of exceptions to the rule.

The key exception to the CGT rule is the family home, so long as it is sold within two years of passing. Beyond this, careful planning and smart strategies can minimise the CGT impact.

The second is superannuation. Super doesn’t naturally form part of an estate and it has its own set of taxation rules. Your super was intended to fund your retirement so the tax office will be looking for a piece of the pie if it heads off towards someone else.

A spouse or dependent child won’t pay tax on super benefits, but adult children and other beneficiaries can lose 17% of super benefits in tax and levies unless forethought and strategies are put in play to minimise or avoid this impost.

Get Estate Planning Help From Financial Advisors Experienced in Inheritance

There’s no doubt that with this sort of life planning, you need to call the experts. Solicitors, financial advisors, estate planners, independent trustees may all need to be involved, but it will be worth it. Reach out to BlueRock’s financial advisors for more details on how you can make your plans for inheritance as safe and rewarding to your loved ones as possible. Remember, your wealth is a hard-earned privilege that holds within it the power to transfer opportunity and greater well-being and happiness to your future generations.