What you can do with an inheritance
Australia is on the cusp of the largest wealth transfer in its history, as the older generation begins passing down trillions of dollars in assets to their children through inheritances. The Productivity Commission estimates that around $3.5 trillion in assets will be transferred in Australia alone by 2050. In this article, we explore the complexities and decisions that come with receiving an inheritance.
Who is going to inherit?
The average Australian inheritance is about $125,000, with most recipients in their 50s.1
A 2023 survey2 showed:
- 27% expect an inheritance of $50,000 to $250,000
- 5% expect an inheritance of $1 million to $2million
Receiving an inheritance often brings mixed emotions. The sudden influx of wealth can tempt even the most prudent savers into impulsive spending. If you're anticipating a substantial inheritance, it’s worth making planned and informed financial decisions, instead of making impulse purchases.
Understanding your inheritance
It's important to understand the nature of your inheritance. Inheritances can come in various forms, such as cash, property, or even shares, and each type has different financial implications. For cash inheritances, there's generally no tax to pay, as inheritances are generally not taxable in Australia. However, if you inherit property and decide to sell it, you may need to pay capital gains tax if the property has increased in value since you inherited it. The ATO provides useful information about inheritance and tax.
What to do with your inheritance
When it comes to using your inheritance wisely, it's crucial to assess your current financial situation. Paying off a mortgage or high-interest debt, contributing additional funds to your superannuation, or investing in other areas can provide long-term benefits. However, the urge to splurge can be strong. Balancing immediate desires with future financial needs could be a good strategy to get started.
Inheritance and the age pension
When it comes to your retirement plan, understanding how an inheritance affects the Government Age Pension is crucial. You'll need to notify Centrelink within 14 days of receiving an inheritance as it may affect age pension eligibility. The inherited amount could count as an asset and might impact income tests, potentially reducing pension payments. Learn more about eligibility for the age pension.
Estate planning and beneficiaries
No one wants to think about it, but it's important to have an estate plan that specifies how you would like your assets to be managed when you die.
An estate plan includes your will and other documents that govern how you will be cared for, medically and financially, if you become unable to make your own decisions in the future. The most important documents are:
- Will
- Superannuation death nominations (beneficiaries)
- Testamentary trust
- Powers of attorney
- Power of guardianship
- Anticipatory direction
You should ask a legal professional to prepare your estate plan. A good estate plan does two things: it will minimise the tax paid by your heirs, and it will help avoid any family differences.
Super and your estate
Your super is considered to be a ‘non-estate’ asset, and therefore won’t automatically be included in your will. Most super funds, including Aware Super, let you nominate the person you want to receive your super and life insurance if you die. The money is paid minus any applicable fees and taxes.
For more information, visit: How to nominate a beneficiary.
1 Wealth transfers and their economic effects – Australian Government Productivity Commission (November 2021).
2 One in four Aussies to spend their inheritance on aged care – Aged Care Insite (May 2023).
