Ruqayyah Snyder
Receiving an inheritance can spark mixed emotions: gratitude for the financial security it brings, and sadness at the loss of a loved one. It can also be overwhelming, with many people unsure of the best course of action. In Australia, the average age of an inheritance recipient is 50, and many choose to boost their superannuation, pay off debts, or invest the money. Some may also wish to honour the deceased by using the money to support other family members or give back to the community. Seeking professional financial advice can help ensure that you make the most of your inheritance and plan for the future.
| Characteristics | Values |
|---|---|
| Average age of inheritance recipient | 50 years old |
| Most popular use of inheritance money | Invest it (30% of respondents) |
| Second most popular use of inheritance money | Pay off mortgage (28% of respondents) |
| Third most popular use of inheritance money | Share it with family (19% of respondents) |
| Other uses of inheritance money | Buy a car, put it in a term deposit, go on holiday, pay off debt, boost investment portfolio, give to charity, increase retirement savings, create an emergency fund, support other family members, pay tax on inherited assets |
| Importance of financial advice | High – can help determine short and long-term financial plans |
| Inheritance tax in Australia | No inheritance or estate tax, but tax may be owed on inherited assets |
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Paying off debts
If you've inherited a large sum of money, you might be considering paying off your debts. This can be a good idea, but it's important to get financial advice first. A financial adviser can help you determine how much of your inheritance should be used to pay off debt and how much should be invested.
If you have high-interest debts, such as personal loans or credit card debt, an inheritance can make a big difference. Large medical debts can negatively affect your credit score, so it's a good idea to get rid of them as soon as possible. However, before you do so, take a closer look at the bill. You shouldn't take medical bills at face value. Is there a way to negotiate the bill's total cost? If you have had a medical procedure and have a mountain of medical bills, get a medical bill advocate to help you negotiate the bills before you start sending out cheques.
If you have more than one debt, try to pay off the ones with the highest interest rates first. Student loans, for example, can put you in a financial prison and make it difficult to get a large loan. You might also consider paying off your car loan so that you have extra spending money each month. However, be sure to read your contract thoroughly to see if your lender will penalize you for paying off the loan early.
Your mortgage may be your biggest debt, and it can be tempting to pay it off with your inheritance. However, it may be a better idea to invest your money rather than pay off your entire mortgage. A financial adviser can help you decide what's best for you.
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Investing
If you are inheriting a family home, there can be capital gains tax consequences if you decide to sell it or use it to generate rental income. Tax implications can be confusing, and a financial adviser can help you determine short and long-term financial plans. In Australia, there are no inheritance or estate taxes, but you may have tax obligations for the assets you inherit. Capital gains tax may apply if you dispose of an asset, and income tax applies as usual to any dividends or rental income from shares or property.
It is important to diversify your investments to minimise risk. Building funds for the future through a variety of assets, including property, stocks, and managed funds, is a smart move. Having a range of assets with different risk profiles can spread any threats associated with your investment.
If you are inheriting a large sum of money, you may want to consider a structured giving program to give back to the community. This can be established with a donation of $20,000. You may also want to consider increasing your retirement savings by making a voluntary contribution to your superannuation.
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Paying off mortgage
Paying off your mortgage with inheritance money is a common choice for many Australians. According to a survey, 28% of Australians would use their inheritance money to pay off their mortgage.
Before making a decision, it is recommended that you seek the help of a financial adviser to determine short- and long-term financial plans. A financial adviser can help you decide how much of your inheritance should be used to pay off your mortgage and how much should be used to boost your investment portfolio.
If you have a fixed-rate loan, many providers do not allow it to be linked to an offset account, nor do they allow early repayment without a break fee. In this case, you can ask about an offset and get a quote for the break fee. You may find it cheaper to wait until the fixed loan matures before transferring it to a variable loan and offsetting it until you buy elsewhere.
If you are set on being debt-free, ask yourself if your mortgage is hurting your finances. Residential real estate values tend to increase by about 3% over the long term, while a balanced portfolio of stocks and bonds can offer a 6% market rate of return, allowing your money to grow twice as fast.
It is important to remember that rushing to pay off your mortgage with your inheritance money may not be the best option. Take time to weigh up your options and consider all affected parties.
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Sharing with family
Sharing your inheritance with your family is a popular choice, with 19% of Australians surveyed choosing to do so. Inheritances can take many forms, including cash, property, shares, or possessions. If you are inheriting cash, it is generally considered wise to pay off any high-interest debts, such as personal loans, credit cards, or a mortgage. This can provide financial stability and peace of mind, allowing you to make more thoughtful financial decisions.
If you are inheriting a substantial amount, you may consider sharing your windfall with other family members to honour the person who gave you the inheritance and strengthen family bonds. This could include supporting them with medical bills, housing costs, or other debts, or simply giving them a gift.
It is important to note that while there are no inheritance or estate taxes in Australia, there may be tax obligations for the assets you inherit. Capital gains tax may apply if you dispose of an inherited asset, and income tax will apply to any dividends or rental income from inherited shares or property. Seeking professional financial advice can help you navigate these complexities and determine the best way to share your inheritance with your family.
Involving your family in your financial plans can foster greater certainty and comfort. Discussing your intentions with your children can increase the likelihood of them making or updating their own will, ensuring that your legacy is protected. Additionally, introducing your children to your financial adviser can help them navigate their own financial decisions and plan for their future with greater confidence.
If you are considering sharing your inheritance with your family, it is essential to take the time to weigh your options and consider all affected parties. This is especially important if there are multiple beneficiaries, as there may be conflicts over retaining or selling assets. Seeking financial advice can help you make informed decisions and ensure that your inheritance has a positive impact on your family's financial wellbeing.
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Donating to charity
If you've inherited a substantial sum of money, you may want to consider donating a portion of it to charity. Not only will you be supporting a good cause, but you'll also be giving back to the broader community. In Australia, you can either donate during your lifetime or leave a charitable gift in your will.
Donating During Your Lifetime
If you've inherited a large sum of money and want to donate a portion of it during your lifetime, you can consider a structured giving program. Such programs can be established with a donation of a certain amount of money, for example, $20,000. This way, you can make a more significant impact with your donation by ensuring it is used effectively by the charity.
Leaving a Charitable Gift in Your Will
Including a charitable gift in your will is another way to donate to charity. This method has the added benefit of potentially reducing the rate of inheritance tax on your estate. In Australia, gifts to registered charities are exempt from inheritance tax. Additionally, if you leave 10% or more of your net estate to a qualifying charity or charities, you can reduce the inheritance tax rate from 40% to 36%. This exemption applies whether you donate during your lifetime or through your will.
It's important to note that tax implications can be complex, and it's always best to seek professional financial advice before making any decisions. A financial adviser can help you navigate the tax consequences and ensure your donation is structured in the most effective way.
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Frequently asked questions
Some of the most common ways people spend their inheritance money in Australia are by paying off debts, investing, and reducing their mortgage. Many Australians also use their inheritance money to help other members of their family, for example, with medical bills, housing costs, or other debts, or simply as a gift.
It is important to conduct research and get professional financial advice before making a decision. Investments can go down as well as up, and in the worst case, you can lose your entire investment. You should also consider the tax implications of your inheritance, as although there are no inheritance or estate taxes in Australia, you may have tax obligations for the assets you inherit. For example, capital gains tax may apply if you dispose of an asset inherited from a deceased estate, and income tax applies as usual to any dividends or rental income from shares or property you have inherited.
Building funds for the future through a variety of assets, including property, stocks, and managed funds, is a smart move. Having a range of assets with different risk profiles can spread any threats associated with your investments. If you are close to retirement, increasing your retirement savings by making a voluntary contribution to your super is a great way to prepare for your future. If you have inherited a substantial amount, you may also choose to use part of your windfall to give back to the broader community, for example, through a structured giving program.
