MAKE SURE YOUR INHERITANCE IS EASY COME, EASY GROW

Receiving an inheritance – particularly a large one – can bring complexity.

 

Balancing capital gains tax considerations with your debt reduction and investment decisions takes careful consideration, particularly if you’re nearing retirement age. That’s where the right financial advice can help.

 

WHAT SHOULD I DO WITH MY INHERITANCE?


Receiving a substantial inheritance comes with responsibility. You will need to make big decisions on complex financial issues.

You may already be asking yourself these sorts of questions:


  • What are the capital gains tax (CGT) implications if I sell a property?

  • Should I pay off my mortgage or invest in shares?

  • If I’m nearing retirement how much should I put in super?

These are not simple questions to answer. Let’s take capital gains tax (CGT) as an example. A large inheritance is likely to be comprised of multiple assets such as cash, property and shares. Every asset needs to be assessed in terms of special capital gains tax (CGT) rules and you will need to keep a record of financial information related to inherited assets in order to calculate your tax obligations.



FIND YOUR ANSWER

 

As you can see from our survey results, there’s a split between investing, paying off debt and using some of the money for discretionary spending like a holiday. Using these insights and our experience in helping Australians with complex financial situations, we have addressed six financial questions you may need to consider when receiving a sizeable inheritance.


We encourage you to seek financial advice on the debt you should pay off as part of your broader financial plan. You could consider paying off debt where there is high interest like credit cards. Reducing your mortgage (principal home) is also worth thinking about as it reduces interest repayments over the term of your loan.

Debt isn’t always a bad thing though. You could use your inheritance to take on more debt to accelerate wealth generation or consider tax-deductible debts such as investment or business loans. 


Tax management is an essential part of protecting your inheritance. If you sell a property or shares received through the estate you may be subject to capital gains tax (CGT).

There are potential income tax implications as well. If you receive an income from the inheritance – through investment property rent or share dividends – it is usually considered to be part of your taxable income. If you are a high income earner you will be taxed at a high marginal rate. It’s also possible the additional income you receive through your inheritance may push you into a higher tax bracket.

Receiving the right tax advice will go a long way to help protect and grow your inheritance.


For most people, super is the most tax-effective way to save for retirement. It’s worth considering using your inheritance to boost your super balance.

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. Alternatively, you could put your surplus income in alternative investment structures such as a family discretionary trust.

Another factor to be aware of is inheriting your partner’s super when they pass away. When combined with your super, it may push you over the $1.6m cap with potential tax implications. 


Our research of 3,000 Australians1 showed the average age to receive an inheritance was 58. This is important because a person’s stage in life should influence the way they invest their inheritance.

It comes down to the amount of investment risk you are willing to take. As a general rule of thumb, younger people take on more risk because they have more time to ride out periods of volatility in investment markets. They usually have an employment income which means they aren’t as dependent on investment returns to fund their lifestyles.

If you are retired or about to retire, you should apply the same risk-based investment approach with your inheritance. The priority should be to protect your nest egg while generating the required income to support your lifestyle. In terms of your investment portfolio, this could mean balancing more volatile assets like shares and property with conservative positions in bonds and shares. A financial adviser can help you structure the right investment strategy for your circumstances.



There’s nothing wrong with allocating a proportion of the inheritance for discretionary spending but it’s important to balance your immediate and long-term needs. This is particularly true if you are retired or approaching retirement because your nest egg needs to last.

Without a salary to fund your lifestyle, you will need to protect your capital and investment returns for the remainder of your life. A financial adviser can help you determine how much of your inheritance should be used to achieve this. This may mean using part of your inheritance to pay off debt and another portion to boost your investment portfolio.

Once your financial plan is in place you will know how much money is available for discretionary spending. That’s why we encourage you to visit a financial adviser before you visit your travel agent.


If you receive a substantial amount (our clients typically inherit more than $1m) you may choose to use part of your windfall to give back, particularly if you are retired or have other sources of wealth. Rather than making a once-off donation, you could consider a structured giving program which can be established with a donation of $20,000. You can either create your own charitable foundation or set up an endowment within an already established fund. Structured giving provides a sustainable revenue stream and allows you to plan when, where and how the funds are invested for maximum social return.

Our philanthropic specialists are on hand to help you make the most of your charitable giving.



WHEN WILL I RECEIVE MY INHERITANCE?


In complex situations it may take up to a year or more for an estate to be administered. We have created this summary to help you understand where you may be in the process.


1.  Confirm assets and liabilities: Verify the assets and liabilities of the estate for a statement to the Supreme Court.


 
 2.  Calculate tax implications: Prepare and lodge tax returns for the deceased estate until it's fully administered.


3. Apply for the probate: Court confirms will validity. Publishes statutory notice for all parties and creditors to lodge a claim against estate.
  

 4.  Collect and realise assets: Probate is granted and assets are prepared for distribution under the terms of the will.


1. Confirm assets and liabilities
 
          Verify the assets and liabilities of the estate for a statement to the Supreme Court. 

5.  Pay legacies and bequests: Cash legacies and items gifted under the will are distributed.
 
 
 6.  Distribute the estate: The remainder of the estate is distributed and each beneficiary receives detailed financial statements.


 

Whatever the duration of the estate administration process, you should have a financial strategy in place before you receive the inheritance. Perpetual can help you stay on the front foot with the experience we have gained from administering thousands of estates.

Inheritances come in all shapes and sizes but the larger amounts are typically the most complex for people to manage

You need to decide whether to sell any of the assets and then consider when and how best to use the resulting funds. Every decision – from paying off debt to investing in shares – is interrelated and should not be made in isolation. A financial plan, tailored to your unique circumstances, will help you protect and grow your wealth.



  • ONE CONTACT POINT

    A dedicated financial adviser backed by an in-house team of investments specialists, solicitors and taxation experts.

  • COMPLEXITY SIMPLIFIED

    We advise clients with complex financial situations involving SMSFs, investments and trusts. Whatever your situation, we can help.

  • eye transparency

    TRANSPARENCY – NO SURPRISES

    Your first meeting with Perpetual is obligation-free and all fees for advice will be shared with you before becoming a client.

Make sure your inheritance is easy come, easy grow

We’re here to help you protect and grow your inheritance

Privacy laws apply to our handling of personal information and we collect, use and disclose your personal information in accordance with our privacy policy.

MORE FROM PERPETUAL

REQUEST A CHAT
[1] Lembit, G., (2019) ‘What do you care about’, Perpetual Client Insights and Analytics, released 26 September 2019

 

Perpetual Private advice and services and Perpetual’s Philanthropic Services are provided by Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. This information has been prepared by PTCo. This webpage contains general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial or other adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The tax information contained in this document is not tax advice and should not be relied on as such.