Coming into an inheritance: key considerations
Coming into a large sum of money in the form of an inheritance is not always a time for celebration. If you are receiving an inheritance, it is likely because you have just recently lost a loved one. In time, deciding how to use these funds becomes an important consideration.
After the complexities of the estate process, inheritances usually take the form of cash once all their financial assets are sold down and taxation has been applied, what is left over can be often a cause of debate for recipients.
Seeking financial advice is paramount in these situations as the last thing you want to be doing is allocating your loved one’s funds in the wrong places. Your life stage and financial position are likely to influence the way you choose to deal with a lump-sum inheritance. Generally, Australians in their 50s and 60s are the ones that receive an inheritance; therefore, the considerations below are directed towards that age bracket but can be applied at any stage in life.
Pay Off debt
The first thought that crosses everyone’s mind is to pay off debt. If you still have a mortgage on your home, you may opt to use the funds to reduce or discharge it. Personal loans should be your first point of call as they generally attract a higher interest rate, freeing up this burden is a great use of funds. Next comes credit cards. Use these funds to pay off that short term debt to create a clean slate. Do not use the inheritance as a quick win and then start living on the credit card again. If you have a habit of spending too much on the credit card now might be a perfect time to seek advice from a financial adviser to put a plan in place so the hard earnt money of your loved one is not wasted.
Paying off your debt at this stage in life may not be a part of your financial plans. If that is the case, you should look to utilise an offset account to park the inheritance money in the account, so you reduce your interest payable on your mortgage. In some cases, the inheritance will be more than the debt in which this case it will be fully offset.
As per my comment before the stage in life where you get an inheritance is around the 50 and 60 mark which means your most likely still working or thinking about retirement. Superannuation is the most tax effective investment you have in your working life. If you are still accumulating there is a maximum tax rate of 15% tax. Many people are deterred by super because its locked away however after 60 there are various ways to release funds with aged 65 being the age you can take it all out tax free. If your Inheritance is large, Super legislation imposes caps on how much you can contribute each year as well as an overall cap on after-tax contributions once your super balance reaches $1.6m. If you are under the age of 65 and have less than $1.6m in super, you may be able to bring-forward up to three years’ worth of non-concessional contributions into your super.
If you are not ready to commit such a large sum of money to Superannuation, you could opt in for a higher salary sacrificing strategy by asking your employer to contribute more to super from your before-tax income and the difference in pay can be drawn down from cash. This reduces you overall tax liability whilst having the money freely available.
Depending on your attitude towards risk you could look to grow the inherited value even more through shares. If you were to do this investing the money in your spouse’s name as they may be on a lower tax rate which is advantageous from an income perspective.
Gifting to your kids
It’s common for some money to go whether its explicitly written in the will that way or the children of the deceased gives their children a small percentage. Gifting this money is commonly used to pay for future education or provide them with a booster to get into the property market any lump sum you give them will go a long way to help for a deposit. It is sensible to consider your own financial position before agreeing to give or lend money and to ensure all parties are clear about the terms of the arrangement.
Many clients ask if paying off their kids HECS is a smart move and in our opinion, it depends on the amount, while you are not rewarded by the government to pay it off earlier, you may just want to get rid of the fortnightly deduction from your pay. However, if the money is smaller in value, the money you give to your kids may be better used in a in a more debt effective way such as paying of their own high interest debt or contributing to their home loan deposit.
Intergenerational transfer of wealth
If you are well off an decide to bypass a generation and gift the next generation the proceeds from the estate, there may be better ways to invest the money for the future rather than gift the money. For years, many Australians have distributed the funds into family and discretionary trusts trying to be creative with their tax liabilities. However, the use of an Investment bond might be a simple and more straightforward alternative. Investment bonds are also a popular choice for estate planning as they sit outside the will and cannot be challenged when a beneficiary is nominated.
Lastly, if you have been pondering a major purchase or have a holiday or special experience you would like to tick off the bucket list, you may consider allocating a proportion of the funds to this. Doing so can sometimes give the item or event additional significance and be a way to honour your parents memory.
Learning to live without a parent – someone you have known and loved your whole life – can be very difficult, and the sense of loss their death brings may take a long time to subside. It is important you allow yourself time to grieve and connect with family and friends to share memories as you settle their affairs and plan for the future.
If you or a loved one are having trouble allocating funds from an inheritance, we would love to help work through all these considerations to ensure your financial goals are achieved while maintaining the legacy of your loved one.
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
Whilst all care has been taken in the preparation of this material, it is based on our understanding of current regulatory requirements and laws at the publication date. As these laws are subject to change you should talk to an authorised adviser for the most up-to-date information. No warranty is given in respect of the information provided and accordingly neither Alliance Wealth Pty Ltd not its related entities, employees or representatives accepts responsibility for any loss suffered by any person arising from reliance on this information.