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Advising Retirees on How to Best Invest their Inheritance

Invest inheritance
Services Used – Wealth Creation, Retirement Planning, & SMSF.

A Yield Client Case Study

Established a diversified investment of $1.26 million invested jointly for tax minimisation 

Preserving large balance super pension With previous advice, it is largely tax free for estate 

Withdrew small taxable super pension removed super death-benefits tax of up to $11,516 

Funding living expenses of $8,583 per month from surplus cash, regular withdrawals & minimum pension 

Introduction  

Determining the best way to invest inheritance, is entirely dependent on your circumstances and stage of life. However, because an inheritance is a windfall financial gain, it is important that you pause and reflect on what you value in life first before you start to spend the money in your mind. This is one-way financial advice can help you avoid wasting the opportunity an inheritance presents and use it to help truly secure your financial future.  

To illustrate an example of this, long term clients of ours Beth & John, came to us seeking some advice on how to invest an inheritance. Beth’s mother had been suffering dementia for some years and had lived the past few years in nursing care. The family home had been sold and there were shares and cash to be distributed amongst the siblings. Beth & John’s share was roughly $1.1 Million, and they sought our advice on how to invest the inheritance. Even considering the long-term relationship we had shared with John & Beth for over 16 years, we went through a process of discussions, education, challenges, and prioritisation to determine the areas of advice we would assist with, which included investing the inheritance in a cost and tax effective manner. This blog is produced with Beth & John’s agreement, to demonstrate an example of how to invest inheritance, for a couple in their late 70’s. 

  

Overview 

Considerate of Beth & John’s needs and wants, our financial advisor team set out to consider the options relating to the $1.1m inheritance, while also aiming to restructure their ongoing cash flow structure. The objective was to meet their income requirements of 103K p.a., as well as maximising their family legacy. 

An additional focus was to review John and Beth's current superannuation accounts and their overarching investment strategy, to determine whether they continue to be appropriate, mindful of their risk profiles and the additional inheritance to be invested. 

  

Inheritance Advice  

Reviewing several options, which included investing the inheritance through a family trust, we firstly recommended that Beth retain her existing superannuation pension account and continue to take minimum pension payments from it. Our advice previously had been to proactively preserve Beth’s super, as prior to their retirement, we had established the fund with entirely taxed money. This means it is largely tax free for their non-dependent kids in the long term.  

For John however we recommended he withdraw his full benefits, or approximately $78,570, from his Superannuation pension Account, and have it paid into their bank account. Ultimately adding the proceeds to the pool of funds from Beth's inheritance to be invested personally. 

Using cash proceeds from the inheritance and John's full pension withdrawal, we recommended they invest $1.26m into a portfolio of diversified investments owned in joint names, to function as income streams to meet their continuing living expenses. Our analysis suggested that investing in joint names was an appropriate strategy for John and Beth, as the projected income and realised capital gains associated with investing these funds is unlikely to trigger a need to pay personal income tax. This strategic approach allows them to invest the inheritance wisely and potentially grow their wealth over time. 

John and Beth also outlined their risk profile as being 70% growth assets and 30% defensive assets, which we utilised to invest in line with. By diversifying their investment portfolio based on their risk profile, we aim to balance potential growth opportunities with stability, ensuring their inheritance is invested in a way that aligns with their goals and risk tolerance. 

Invest inheritance

Superannuation Advice 

Our recommendation for John to close his pension account created a variety of benefits. Firstly, it simplifies the management of their finances. By consolidating their assets and accounts, John and Beth have a clearer overview of their financial situation and make more informed decisions.  

Additionally, closing the account helped minimise ongoing platform costs. By eliminating the need to maintain the superannuation pension account, they can save an estimated $374 per year in fees. This reduction in expenses contributes to their overall financial well-being and provides more resources for other financial goals or investments. 

Furthermore, closing the account removes the risk of super death-benefits tax. As part of our original advice when we met John & Beth, we had made John’s super the primary source of income, because it was almost entirely taxable, and while it was tax free to John & Beth for as long as they are alive, it would be taxable to the non-dependent children. This eliminates a tax liability of up to $11,156 for their kids. By closing the account, they eliminate this potential tax burden, ensuring that their financial resources are not unnecessarily reduced by taxes. 

Another benefit is that John and Beth are both over 60 years old and retired. As a result, they will not be required to pay tax on the withdrawal of funds from the superannuation pension account. This tax exemption allows them to access their retirement savings without incurring additional tax liabilities, providing them with more flexibility and financial security during their retirement years. By strategically managing their superannuation, they can optimise their retirement income and invest the inheritance in a tax-efficient manner. 

Overall, the closure of John's Superannuation Pension Account simplifies their financial management, reduces ongoing costs, eliminates potential tax burdens, and grants tax-exempt access to their retirement savings. These strategic decisions contribute to a more efficient and effective financial plan for John and Beth's retirement. 

  

Cash Flow Management 

As John and Beth are retired, their cash flow is all about how they will continue to meet their ongoing expenses. In all stages of life, keeping on top of their changing needs is also highly important. In our calculations, we have made sure $10,000 is always retained as available cash. We recommended John and Beth utilise a high-interest cash account that they can readily access as needed. 

We also recommended John and Beth set up a regular withdrawal from their joint investment account to be paid into their bank account. These payments will supplement the income from Beth's minimum pension payments to ensure their income needs are met. Our analysis suggests that drawing more of their income from the investment account than Beth's pension will maximise the value of their legacy to be distributed to their beneficiaries, by preserving Beth's benefits, which are 91.76% tax-free. By strategically managing their cash flow, they can ensure a steady income stream while preserving their inheritance for future generations. 

Invest inheritance

Estate Planning 

Since their additional investment capital is invested in joint names, it will now become an estate asset. It is for this reason that we encouraged John and Beth to seek professional legal advice, as having their wills reviewed by a Solicitor is set to maximise the chances of their estate being distributed the way in which they would prefer. It will also see to successfully minimising contests. As a result of this advice, they have set up comprehensive Wills that include testamentary trusts. This has helped them to provide more flexibility and control to their estate. Proper estate planning ensures that their investment inheritance and other assets are distributed according to their wishes, minimising potential disputes and providing clarity for their beneficiaries. 

 

Benefits of Our Advice 

It is an honour to have cultivated this long-lasting trust we have with John and Beth, who have been long time clients of Yield Financial Planning. We've had the privilege of assisting them to transition into retirement, just before the GFC and to help them come through it confident and prepared for a secure retirement. We’ve assisted them to structure their affairs in a smart manner; manage their investment portfolio; and navigate their super contributions; and more. 

As a result of the most recent advice we have provided, John and Beth were able to invest the $1.1m Beth inherited and help them enhance their financial position. Additionally, we re-structured their ongoing cash flow structure for the benefit of meeting their income requirements of $103k p.a., while maximising their family legacy. By working together to invest inheritance wisely, manage their superannuation effectively, and streamline their cash flow, we have helped John and Beth secure their financial future. 

Determining the best way to invest an inheritance varies depending on each person's specific situation and their individual goals. It is highly valuable to consult with an expert, as they can advise you on the best ways to invest an inheritance, develop a plan to help you meet your long-term financial objectives, and steer clear of any potential tax pitfalls. Investing inheritance requires careful consideration and professional guidance to ensure optimal outcomes for your financial well-being. 

If this appeals to you or if you wish to talk about your personal financial situation, please get in touch with us. We are here to assist you in investing your inheritance wisely and achieving your financial goals. 

Important Note 
Produced with our client’s permission. Names within this case study have been changed to protect the client’s right to privacy. The content of this case study has been based on a real-life client. Any information provided here is general advice only and does not consider your objectives, financial situation or needs. This information should not be taken as comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other professional advice before relying on any content. Yield Financial Planning is not responsible to you or anyone else for any loss suffered in connection with the use of this information. Information is only current at the date initially published. 
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