First off, if you’re reading this blog post because it applies to your personal circumstances, then please know you have our most sincere condolences. Losing a loved one is one of the hardest things to go through in life, and we hope you are managing this monumental event as best you can.
In Australia, someone who receives an inheritance from the passing of an individual is known as a beneficiary. A beneficiary can receive all, or part of, the estate of the deceased. Receiving an inheritance can be an incredibly conflicting, and bittersweet event for many, as the money can be life changing, but losing a loved one equally so. To make the event even more confusing, there are various tax and legal obligations that need to be considered when you are a beneficiary.
In this blog, we will cover off some of the main items and obligations that you, as a beneficiary, need to be aware of, in order to make this time a little less difficult for you. We will also go over some of the things you should be aware of when it comes to deciding how you will spend your inheritance, as we know sometimes it can be tempting to blow all the funds on a holiday, or new car! But is that what’s best for your financial future? Let’s dive in.
Upon receiving your inheritance…
Here are some of our top tips for making decisions on what to do with your inheritance. Knowing what to do with the funds, or assets, can be extremely difficult at the time, so it’s important that you take it slow and don’t act rashly. So, if you find yourself the beneficiary of an inheritance, here are some good first steps:
- Take a deep breath
Pause for a moment. Give yourself time to grieve your loss, and to reflect on your loved one.
- Take an honest look at your finances
It can be tempting to spend your inheritance lavishly and quickly, but it is important that you take stock of your finances before acting rashly. Although a spontaneous holiday or new car may seem like a good idea at the time, that inheritance is a financial gift that could also be used to substantially improve the quality of your current, and future position.
- List out your financial needs
This is an important step that unfortunately so many people miss! Your inheritance could make such a difference to your finances, but where is it most needed? Paying off your mortgage? Your credit card debt? Save it up for kids’ university fees? Or contribute a lump sum to your super account? If you’re unsure of where to steer the money, this may be a good time to meet with a Pursue Wealth adviser.
- Expert Advice
Seeking expert advice may help you best identify what your most pressing financial needs are, and how to spend that money. They can also help you with our last point, which may be last, but certainly not least:
- Make sure you are acting in alignment with your risk tolerance
This is unfortunately another mistake we see too many people making. When receiving a large inheritance some may decide to invest it all in a high risk asset or investment, which is outside of their usual risk tolerance. If you feel as though you are tempted to sink your entire inheritance into one new crypto coin you read about online, it may be best to consult a financial adviser beforehand! Make sure you honour your loved one through being careful and considerate with the financial blessing that they have left you with.
Different Types of Inheritance
There are many different forms that you may receive an inheritance in. Each of these types of financial inheritance may carry their own legal and tax obligations that you should carefully consider. If you are overwhelmed with all of the legal text (which can be very confusing) be sure you ask the lawyer in charge of the estate to explain everything thoroughly, and to consult the other appropriate experts, such as your accountant or financial planner.
The superannuation paid after a person’s death is called a “Super Death Benefit.” If there is no binding or non-binding death benefit agreement in place at the time of the deceased passing, then it is up to the superannuation fund trustee to determine who receives the super death benefit. Super death benefits can be paid out either as a lump sum or as an income stream. How much tax you pay on a super death benefit depends on a number of your personal circumstances, and how you were related to the deceased.
This is a very broad umbrella term, as there are so many different types of assets you can inherit. For the purposes of this post, assets can be shares, crypto, tangible assets such as jewelry, cars, and investment properties. For all of these assets, you will not be charged a capital gains tax when you receive them. However, should you later sell the asset on, you may be charged with a capital gains tax. How much this is may be dependent on your marginal tax bracket.
The Main Home
If you inherit the main residence of the deceased, the taxation legislation is slightly different. Assuming that the property was used exclusively as a home, and not for investment purposes, then for a period of two years after the deceased’s passing there is no CGT should you decide to either live in the property yourself, or sell it. Should you sell the property after two years, then a capital gains tax will likely apply to the property.
Ways to Use Your Inheritance
One of the most commonly asked questions we receive from our members is “what should I do with my inheritance?”. The answer to this question really depends on your own unique, personal situation, however, here are a few ways we’ve helped members use their inheritance previously. All of these ways resulted in a great improvement of our members’ financial situations.
- Pay off, or pay part of your home loan,
- Invest all or some money into a well-diversified investment portfolio
- Contribute a lump sum to your super (you may be able to claim a tax deduction!),
- Contribute to your spouse’s super,
- Pay of any outstanding personal or credit card debt,
- Save for your children’s (or your own) future education fees
That being said, some members do opt to spend a small portion of their inheritance on a small trip away, or something to remind them of their loved ones. There is no hard and fast rule to follow when it comes to this topic, and we understand this; inheritance is not a one size fits all. If you are feeling overwhelmed, please don’t hesitate to reach out to the expert team at Pursue Wealth, and let us help you navigate this tough period.