This article is essential reading if you’ve received an inheritance or you have an asset base which will flow down to children in the future. Starting conversations about the family's asset base and succession planning always helps with a smooth transition. Let’s dive into everything from inheriting property from your parents, paying tax on inheritance, what to do with your inheritance and why you should seek financial advice.
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 advisors working with clients who receive inheritances much larger (it’s not uncommon when the family home in an average Aussie suburb is valued in the millions) 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.
As financial advisors specialising in generational families, we can provide valuable guidance and support during this transition, helping you make smart decisions in a difficult and emotionally charged time.
We help our clients understand and maximise their financial situation, covering everything from risk tolerance, goal setting, tax issues, investing and protecting inherited wealth for generations to come. When we work with Baby Boomers who have grown a substantial asset base they often ask us to start the financial education journey with their adult children..
Will You Have to Pay Tax on Inheritance?
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 e.g, 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.
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.
Speak to a BlueRock Financial Advisor About Managing an Inheritance
BlueRock’s financial planning team works closely with clients to provide strategic guidance through a customised financial roadmap tailored to their individual and family aspirations. As part of a multidisciplinary community of private client accountants, investment advisers, mortgage brokers, commercial lenders, insurance advisers, SMSF experts, and broad legal expertise, we provide a holistic and progressive approach to financial planning. Get in touch with BlueRock’s experienced financial advisors today.
Disclaimer: The information in this document is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.
