Your inheritance is personal. Advice should be too.
By 2025, around $1 trillion will pass to the next generation of Australians – and $3.5 trillion by 2035.1 If you’re expecting to receive an inheritance in the next few years, especially one of a million dollars or more, it can be a life-changing opportunity. It’s also one of life’s major financial decisions, bringing new challenges and complexity as your lifestyle and wealth management goals change.
Alternatively, you may be preparing to transfer your assets and are considering when and how best to pass them on – safely and sustainably.
Whatever your situation and goals for your family wealth, we’ve prepared a range of important information to help you understand what’s involved.
If you prefer to talk to an adviser about your estate and inheritance needs, call us on 1800 631 381.
Six ways to use your inheritance
Given the complexities of managing an inheritance, we wanted to find out what Australian beneficiaries are doing with the money they receive. We surveyed 3,000 people as part of our “What do you care about?” project.2 The most popular way to use an inheritance was to invest it – preferred by 30% of respondents, followed by paying of the mortgage (28%), then sharing it with family at 19%. Rounding out the top six was buying a car, putting it in a term deposit and going on a holiday.
Using these insights and our experience, we have addressed six financial questions you may need to consider when receiving an inheritance of a million dollars or more.
Seer Data’s research1 showed that 84% of the $1 trillion to be transferred by 2025 will be transferred to Australians aged 65 years and over. This is important because a person’s stage in life can 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 tend to 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, the same risk-based investment approach with your inheritance is an important element to consider. The priority may well 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.
Learn more about investing in an inheritance.
1. Seer Data estimated of intergenerational wealth transfer, derived from 2016 ABS data
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) may also be worth thinking about as it can reduce interest repayments over the term of your loan.
Debt isn’t always a bad thing though. Another possible option may be to use your inheritance to take on more debt to accelerate wealth generation or perhaps even 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 there may be capital gains tax (CGT) consequences.
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 could 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.
Will I pay capital gains tax (CGT) on my inheritance? In this article, we consider the CGT implications when it comes to selling assets of the estate.
For some people, super can be a very tax-effective way to save for retirement. It’s an option possibly 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. This is a complex area where tailored financial advice can be very useful.
Looking to invest an inheritance in Super? There are complex rules for making super contributions which you should be aware.
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 for a long period of time.
Without a salary to fund your lifestyle, protecting your capital and investment returns for the remainder of your life is often of key importance. 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 to the broader community, 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.
Looking to give to charity in your will? A charitable foundation could help for decades to come. Learn more about charitable giving.
NAVIGATING WILLS AND THE ESTATE ADMINISTRATION PROCESS
Passing wealth to the next generation comes with risk. In fact, over 70% of intergenerational wealth transfers fail2. Regrettably this means significant family wealth is often squandered within a generation or two. Putting in place a plan that helps your family understand and prepare for the challenges of managing significant family wealth is vital. When you do, you can be confident that your family will be among the three out of ten families who transfer wealth successfully.
Discussing your legacy with family
Emotionally preparing for an inheritance
The estate administration process
People often say there are two things you should never talk about: politics and religion. But when we talked to 3,000 Australians, we found another — legacy. Only 36% of people have discussed their parents’ will and legacy with them3.
It’s remarkable that so many of us are so close to our children, but never talk to them about what we would like to happen to the wealth we’ve spent a lifetime building up.
For most of us, inheriting is the single biggest injection of cash or capital we will ever receive. But 1 in 53 of us are expecting to inherit without really being certain we will. For something which can make such a massive difference to our lives — it’s a lot to take on trust.
Who discusses inheritance?
According to our study3, while any family might talk about their legacy, there are some that are more likely to. Families who are close to each other, families that describe their relationship as loving and caring, are 5% more likely to discuss legacy. Happy, close families are also 10% more likely to:
- Receive an inheritance
- Be grateful for what they receive
While it’s unsurprising that close families are more likely to have difficult conversations, there are other factors which make a discussion about inheritance more likely. We’re not sure why, but women are 12% more likely to talk to their parents about their will (42% vs 30%)3.
Perhaps they are closer to their parents, or better communicators, or more comfortable talking about difficult subjects?
Age is also a factor. By the time children reach their teens, around one quarter3 of parents have discussed their inheritance with them. This percentage increases gradually until children are in their 40s and 50s. But if you haven’t discussed it by then, chances are you never will.
Just as everyone is different, so are their reactions to inheriting. While people are most likely to feel grateful, they might also experience a whole range of other emotions including happiness, surprise, relief or disappointment.
While 76% of people are likely to feel grateful for their inheritance, this rises to 86% if you describe your family as happy or close3.
Size also matters, but maybe not in the way you might think.
35% of people feel happy about their inheritance and this rises to 52% if they inherit what they describe as a ‘large’ amount.3 Also, the larger the inheritance, the more likely you are to feel excited and relieved.
However, interestingly, the larger your inheritance the less likely you are to feel grateful. 78% of people feel grateful for a self-described ‘small’ inheritance and 75% for an ‘average’ inheritance, but this drops to 69% when a ‘large’ inheritance is at stake.3 Also, while the overall percentages are quite low, people who inherit a ‘large’ amount are around twice as likely to feel ambivalent or underwhelmed than those who receive a small amount.
The benefits of breaking your silence
Admittedly, talking about what happens after you die is uncomfortable, but it’s also important. And really, while it isn’t an easy conversation to start, talking about your legacy, will, or estate plan should be a conversation about love. A conversation about who and what is important to you.
As part of this conversation, you may consider introducing your children to your financial adviser. It can be valuable to involve your children in your estate plans as this can lead to greater certainty and comfort on a subject which is usually clouded by doubt, worry and angst. When parents discuss their intentions with their children, suddenly the percentage of people who think they will inherit jumps from 53% to 80%.3 That’s a lot more people that can plan their future with greater confidence.
There’s also another, perhaps unexpected, side effect of discussing your legacy with your children. It makes them more likely to seek advice and make or update a will themselves. While only 36% of Australians have discussed their will with their parents, this jumps to 55% for people who have a will of their own. A 20% difference3.
It’s easy to imagine the ways an inheritance will make your life easier. What’s a little harder is being ready to receive an inheritance, from understanding the financial structures involved to how long the estate administration process can take.
It’s also important to recognise that, while an inheritance gives you opportunities, it can also be disruptive to family relationships and the family as a whole.
Perpetual can help you prepare and plan for your inheritance so when the time comes, you can avoid making potentially regrettable decisions – and instead have the peace of mind that long-term financial security provides.
When will I receive my inheritance?
In complex situations it may take up to a year or more for an estate to be administered. Here is a summary of what’s involved to help you understand where you and/or the estate executor 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 as part of the application for Probate.
2. Apply for the probate: Court confirms will validity. Publishes statutory notice for all parties and creditors to lodge a claim against estate.
3. Calculate tax implications: Prepare and lodge tax returns for the deceased estate until it's fully administered.
4. Collect and realise assets: Probate is granted, and assets are prepared for distribution under the terms of the will.
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.
What should you consider when inheriting wealth?
Receiving an inheritance can change your lifestyle today, as well as your long-term goals. With so much at stake it’s important to have the financial skills to manage it. It’s something we, at Perpetual Private, care deeply about and to help spread the word we partnered with the BBC to share four important stories on different emotional and financial considerations of inheriting wealth.
OUR ADVISERS – IN THEIR OWN WORDS
Perpetual is an ASX-listed financial services company which has been serving Australians since 1886 when it was established as a trustee company by a group of businessmen including Sir Edmund Barton, later to be Australia’s first Prime Minister. That trustee heritage – and the culture it created around putting clients first – is what makes Perpetual unique.
With such a long history, many of our client relationships have lasted generations, with Perpetual trusted to advise on and invest inheritances to spouses and from one generation to the next.
We know that while inheritances come in all shapes and sizes, amounts over a million dollars are typically complex to manage.
You need to decide whether to sell any of the assets and then consider how best to use the resulting funds. Every decision, from paying off debt to investing in shares, is interrelated and shouldn’t be made in isolation. A financial plan tailored to your unique circumstances will help you protect and grow your wealth.
One contact point: You get a dedicated financial adviser backed by an in-house team of investment specialists, estate and trust specialists and taxation specialists.
Complexity simplified: We advise clients with complex financial situations involving SMSFs, investment companies and/or varying forms of trusts. Whatever your situation, we can help.
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.
Meet the team
Ed is an Associate Partner and trusted wealth adviser to families and private business owners.
Ed has over 16 years’ experience in the financial services industry and believes careful planning, stewardship and patience are the keys to protecting and growing family wealth.
Ed areas of specialisation include:
- Investment management and asset allocation advice.
- Inter-generational family wealth planning and inheritance advice.
- Retirement planning.
- Family philanthropy advice.
Ed is a Certified Financial Planner and holds a Bachelor of Business (Economics and Finance), Bachelor of Laws, and a Graduate Diploma of Financial Planning.
Robert is the Partner of NSW’s High Net Worth division.
Before joining Perpetual in July 2017 he was an Investment Consultant with the Private Investment Consulting ('PIC') team within NAB Asset Management providing investment consulting services private and institutional clients.
Immediately before joining the PIC team he was Head of Fixed Income and Senior Adviser in the Private Wealth Management division of Wilsons Advisory in Sydney responsible for the investment management of institutional and private client portfolios. Before that role, Robert was with Nikko AM, responsible for managing Nikko’s relationship with key institutional clients for the fixed income business, as well as developing and implementing tailored fixed income strategies for these clients.
Previously, he was co-founder and executive director of Columbus Capital Ltd (a capital markets origination and funds management firm of ‘RMBS’ assets), and has also worked as a senior investment specialist with AMP Capital Investors Fixed Income and Currency and with Westpac Institutional Bank as an associate director in the debt capital markets division providing coverage of fixed income and credit markets, as well as being a senior analyst in high yield and emerging markets in London with Bankers Trust International PLC and ING Barings respectively.
Andrew is the Partner of SA’s Not For Profit division.
With over 32 years experience, Andrew specialises in advice to large complex organisations, family offices, not-for-profit clients and philanthropic trusts. He has a deep understanding of the unique needs and strategic objectives of not-for-profit organisations and helps his clients implement best practice investment policies. Andrew also connects clients to other parts of the Perpetual business, including Philanthropic services.
Prior to joining Perpetual, Andrew held senior adviser roles within commercial and private banking based in Adelaide for the last 9 years. Andrew has also held senior manager roles in institutional banking at JPMorgan Chase, Deutsche Bank and Royal Bank of Scotland in Tokyo, Singapore, London, New York and Sydney over a period of 20 years.
Andrew has a Bachelor of Business (Finance), Advanced Diploma of Financial Planning, is an accredited Self- Managed Super Fund adviser (SMSFA) and speaks several languages.
Chris is a Partner in Perpetual Private’s Western Australian office. He specialises in securing the financial futures of successful Australians.
In 2019, Chis was ranked number 29 in the influential Barron’s Top 50 Financial Advisers in Australia.
With over 25 years’ experience, Chris is an expert in looking after the complex advice and strategic wealth requirements of High Net Worth clients and their families. Chris also has a deep understanding of self-managed super funds and how to maximise super for enduring financial security in retirement.
Chris also looks after Health & Personal Injury clients, managing their Personal Injury Compensation Trusts to provide a better quality of life, medical care and peace of mind knowing a compensation payment will last long into the future.
Chris also helps clients establish Philanthropic Trusts to give strategically to charities by taking into account taxation and other factors in their giving.
Chris is a qualified Certified Financial Planner ® or CFP ® and holds a Diploma of Financial Planning from Deakin University. He has also completed an Advanced Management Program from the Australian Institute of Management (AIM) and is an Affiliate of AIM.
Tony is the Associate Partner of VIC’s High Net Worth division.
Tony provides sophisticated financial advice to Perpetual’s private clients. He has extensive experience in investment management, retirement planning, superannuation, taxation, estate planning and recommending appropriate strategic structures.
Tony enjoys working closely with clients to develop highly effective investment strategies and structures which help to ensure that their financial goals are achieved.
Tony has a Diploma in Financial Planning – Financial Planning Association of Australia, 2003. He joined the financial services industry in 1993 and has been with Perpetual since 2002. His previous roles and experience in financial services include Financial Adviser and Client Relationship Manager with AMP and the Commonwealth Bank.
As a qualified, dedicated adviser, Marisa has focused exclusively on providing personal strategic and investment advice to private clients and high net worth individuals over the past 20 years.
Prior to joining Perpetual, Marisa has worked as a senior adviser across both Global and Australian institutions such as Macquarie Bank, Citibank and Westpac Private. Her areas of expertise include, superannuation, retirement planning, SMSF, specialist structured investments and Foreign Exchange.
Marisa’s most important attributes are her exceptional interpersonal skills and ability to build trust and rapport with clients. Upon meeting with Marisa, it is immediately apparent that she is passionate about assisting clients achieve their goals by helping them make well-informed decisions to manage, grow and protect their wealth.
Marisa is committed to providing her clients with the highest quality financial advice and takes pride in building long standing relationships. In her role at Perpetual, Marisa’s mission is to provide an exceptional level of service and an unwavering commitment to simplify often complex strategies to help clients reach their goals and objectives.
Marisa delivers a myriad of investment solutions by bringing in specialist teams within Perpetual, including investment strategy & research, portfolio construction, philanthropy, and tax accounting.
To contact any of our team, please complete the form below or call us on 1800 631 381.