Australians over 60 are expected to transfer trillions of their wealth to younger generations over the next few decades. The baby boomer wealth transfer is resulting in more wealth moving between family members, often before death to assist with helping their younger family members.

Receiving an inheritance provides a financial boost, but also comes with the responsibility of managing it wisely. This blog will explain how to navigate the decisions around inheritance money, ensuring you can make informed choices that align with your goals and values.

Understanding The Inheritance

Inheritance typically refers to the assets, properties and wealth passed down to beneficiaries after someone passes away. These assets vary but are usually cash, investments, shares, property, businesses, and personal belongings. An inheritance can come from various sources, such as parents, grandparents, and other family members.

In many cases, receiving an inheritance can be a life-changing event, providing financial security, opportunities for investment, debt repayment, or the ability to achieve personal goals. However, without proper planning and management, an inheritance can also present challenges. This is why understanding the nature of the inheritance and how it fits in with your broader financial goals is so important.

Before making any decisions, it’s important to understand the nature of the inheritance. Below are some key questions to consider:

1) What Type of Assets Have Been Inherited

Cash
Property
Investments (shares, managed funds, investment property)
Personal property (jewelry, cars, art, and collectables)

2) Are There Any Conditions or Restrictions

Trusts with specific distribution rules
Tax implications
Specific instructions in the Will or conditions for receiving the assets

3) What Are the Immediate Financial Needs

Outstanding debts
Immediate expenses (funeral costs, legal fees)

Step 1: Pause and Plan

The first step after receiving an inheritance is to pause and plan. This period allows you to process the emotional aspects of the loss and think clearly about your financial future.

Avoid Impulse Spending

It’s natural to feel the urge to make purchases or investments immediately. However, giving yourself time to reflect and plan can prevent the wrong decisions.

Seek Professional Advice

Meeting with accountants, financial advisors, and legal professionals can provide clarity and help to understand the full scope of the inheritance. These professionals can assist with:

Calculating tax implications
Setting financial goals
Creating a comprehensive financial plan

Step 2: Start or Boost Your Emergency Fund

An emergency fund is an important component of financial stability. It ensures that funds are available for unexpected expenses such as medical costs, car repairs, job loss or pet expenses. Generally holding 3 to 6 months of expenses is ideal in an easily accessible account.

Step 3: Consider Your Financial Goals

An inheritance can be a powerful tool in achieving financial goals. Below are some common goals to consider:

Home Ownership

If you are not already a homeowner, an inheritance could allow for a deposit on a property. If you already own a home, it might allow for paying down the mortgage or making home improvements.

Retirement Savings

Investing in superannuation can provide long term benefits. Contributing to super can offer tax advantages and can help to secure your retirement. There are many rules for superannuation and appropriate planning is required.

Education

Allocating funds towards educational expenses can be valuable for example paying down student loans, saving for children’s education, or pursuing further education.

Step 4: Purchase Larger Items

If there are significant upcoming expenses such as replacing a car, holiday, or wedding, by setting aside a portion of the funds for these goals it can prevent you from taking on additional debt.

Step 5: Giving Back

Inheriting money can be an opportunity to give back to causes that you care about. That can include donating to charity or supporting a community project. Philanthropy can be a fulfilling way to utilise funds.

Step 6: Create or Update Estate Plan

Receiving an inheritance can be a reminder of the importance of having an estate plan in place. Ensuring that there is a will, power of attorney and they are kept up to date.

Tax Considerations

Inheritance Tax

There are no inheritance or estate taxes in Australia. However, there may be tax obligations for the assets inherited. For example, capital gains tax may apply if an asset inherited from a deceased estate is disposed. Income tax applies as usual to investment income, for example dividends from shares or rental income from property inherited.

Emotional Considerations

Coping with Grief

Losing a loved one is emotionally challenging. Allow yourself time to grieve and seek support from friends, family, or professionals if needed.

Handling Guilt

It is common to feel guilty about receiving an inheritance, especially if it is substantial. It’s important to remember that your loved one wanted you to benefit from their legacy.

Family Dynamics

Inheritances can cause tension among family members. Open communication and if necessary, mediation can help work through any disputes or misunderstandings.

Conclusion

Receiving an inheritance can be a pivotal moment in your financial journey. By taking a thoughtful and strategic approach, you can make decisions that will enhance your financial well being. By pausing and planning, seeking professional guidance, and considering long-term goals will ensure the funds are allocated appropriately.

Frequently Asked Questions

1) What should I do first after receiving an inheritance?

Take time to process the emotional aspects, set goals and consult with financial professionals to understand the full scope of the inheritance.

2) How can I minimise taxes on my inheritance?

Work with a qualified tax professional and financial advisor to explore strategies and to understand any applicable capital gains taxes.

3) Is it better to pay off debt or invest?

Paying off debt can save interest, and investing can help to build wealth. A balanced approach tailored to your financial situation is often best. For tailored advice, consult a financial advisor.

4) Should I update my own estate plan after receiving an inheritance?

Yes, updating the estate plan ensures your wishes are clear. Consult with a estate planning professional to review and update estate planning documents.

About Unified Wealth

Unified Wealth is a Macedon Ranges based financial planning firm dedicated to helping individuals achieve their financial goals. Our personalised service and cost-effective advice sets us apart, ensuring you receive the guidance you need to build your financial future.

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