Receiving an inheritance should be considered a blessing, although if not managed correctly, it can often result in a large tax bill. An estimated amount of 3.5 trillion is set to be handed over to younger Australians from baby boomers within the upcoming 20 years, resulting in Australia being on the brink of its largest handover of wealth to date.
With this being the case, it is now more important than ever to understand how to manage these funds in a tax-effective way in order to generate long-term prosperity. To guide you in the right direction, we are going to be providing you with some insight on the best ways to invest inheritance in Australia.
What is an Inheritance?
To put it plainly, an inheritance is the passing down of assets from one person to another, which takes place after someone has passed away. Assets are known to be valuable items that can take many different forms, including cash, property and investments.
To manage an inheritance as best as possible, it is integral to prioritise how you intend on utilising it, which can be dependent on your goals. If the inheritance is viewed as a windfall, you may elect to gift it to your children. If you have debt, such as personal loans or credit card debt, it may make sense to pay these off to start with. This logic would also be applicable if you have little to no emergency fund.
Factors to be Considered When Determining How to Invest an Inheritance
Determining the best way to invest an inheritance varies depending on each person’s specific situation and their individual goals. With this said, age is always a useful factor in determining the options available for those receiving an inheritance, along with considering the person’s risk profile.
Past research has demonstrated that 80% of money passed down from parents goes to people aged 50 and over. This could mean the recipients of the inheritance are likely to be in retirement or nearing that stage of their life and depending on this one option that is always worth considering is whether you can make any contributions to your superannuation, in line with government regulations.
Investing an Inheritance into Superannuation
Superannuation is an avenue we consider for clients and can be the best way to invest inheritance. It is a tax effective method for growing and sustaining retirement funds and can often lead to more desirable outcomes in the long-term. This is due to the low concessional rates for earnings and contributions, generally in conjunction with tax-free withdrawals that are made accessible once preservation age is reached.
With funds that are not used to grow a superannuation balance, we may then consider the option of an investment portfolio outside of superannuation. By choosing to invest an inheritance, it can provide you with the opportunity to compound wealth that otherwise may not have been achievable.
Other Avenues to Utilise When Choosing to Invest an Inheritance
With funds that could not be used to grow a superannuation balance or as an alternative, you could consider an investment portfolio outside of superannuation. By choosing to invest an inheritance, it can provide you with the opportunity to grow and compound wealth that otherwise may not have been achievable.
Investing a sizeable amount of money that stems from an inheritance, it is generally best to ensure that the investments you make are diverse. This would mean expanding your investment portfolio by investing in various funds, bonds, and stocks, which can create a good risk adjusted return for an inheritance. You may also be advised to set up a specific structure to invest the money to make it more tax effective in the future.
One inclination you may have is to simply leave your inheritance windfall in a bank account, because it is secure and simple, however this is unlikely to be the best use of the money. This is because you would ideally prefer to see your inheritance really work for you towards your life goals. To manage an inheritance to its full potential, you should properly explore all your options, considerate of what is important to you, which is where the assistance of a financial planner can really help.
When considering these avenues of investing, it is good to begin by acknowledging your risk tolerance as all investments are dependent on your individual risk tolerance and profile.
Tax Obligations
There are various tax effective measures to be harnessed when investing an inheritance, with one of the most commonly used methods being superannuation, as mentioned above. These tax-effective measures are all dependent on extraneous variables in relation to your specific situation, including age, risk tolerance and profile.
Australia doesn’t have an inheritance death tax in any of its territories or states, which allows for the total of the deceased’s estate to be left untouched. While there is no standing inheritance tax, changes that occur to someone’s financial situation following an inheritance may be subject to taxes, such as interest earned, capital gains, etc.
It is highly recommended that you talk to an expert in this situation, as an experienced financial advisor can help you identify the best way to invest an inheritance, while developing a strategy that aids you to reach your long-term investment goals, as well as help you avoid the possible tax pitfalls.
Yield Financial Planning is Here to Help
To harness the full potential of an inheritance we recommend getting in touch with a financial advisor to guide you towards long-term prosperity. We hope this provides you with some clarity in regards to the best ways to invest an inheritance in Australia. If you have any queries about the topics covered above, the team of industry experts at Yield are here to help.
