Inheritance: Managing the Big Wealth shift

More than $3.5 trillion dollars of inherited funds are expected to change hands within Australia during the next 20 years, with Australians enjoying one of the highest inheritance payout rates anywhere in the world.

According to investment bank HSBC’s Future of Retirement report[i], Australians pass on average $561,000 to their heirs, almost four times the global average of $148,000, with two in every three Australians planning to leave an inheritance.

This payout rate is significantly higher than has been the case for previous generations, with higher property prices and ever-increasing retirement savings creating larger estates to be handed from one generation to the next.

Unlike most OECD countries, there are no inheritance taxes in Australia, so this has also encouraged Australians to hold on to their estates until they pass, rather than distributing assets to the next generation while they’re alive. 

The only exception is superannuation.

For example, if a person inherits funds from a loved one’s superannuation account and they are not considered a dependent for tax purposes, the transfer will trigger a death benefit tax of up to 15%, plus Medicare levy!

This can be reduced if the person leaving the funds withdraws the money before they pass away. But given most people don’t know exactly when they will die, this is a rare event and hard to plan for.

Another possible way of avoiding this death benefit tax is to establish a family trust.

Establishing a family trust can be complex, expensive, and requires sophisticated legal and tax advice before being implemented. However, it can successfully mitigate some tax implications under the right circumstances.

Any asset can be inherited - from property to jewellery, shares in listed companies, and fine art. Even animals can be included in your Will. If you can own it, then it can be passed on to a beneficiary when you die.

Receiving an inheritance can be more complex, so professional advice should be obtained regarding how to best manage and invest funds received.

Regarding Centrelink entitlements, inherited funds are included for the purpose of the asset test. Therefore, they are subject to the normal deeming regulations and will impact pension entitlements accordingly.

For most people, the biggest challenge is to find a way to squeeze these funds into superannuation, where they can be invested within a tax-advantaged environment. And once they are used to support an account-based pension, they will effectively become tax-free in terms of any capital gains or income, which is where you need to seek professional advice.

The rules governing how much can be contributed to super, and when, will vary depending on your age, whether you are still working or not, and how much you already have in super.

As estates become larger, it is increasingly important to get good advice to ensure your assets are distributed in line with your wishes. The simpler and more straightforward your Will, the more likely it is to be successfully implemented.

In addition, some advisers will encourage clients to take an additional step and where possible, either in writing or via verbal conversations with beneficiaries, outline precisely what your wishes are and the reasons behind them. By doing this, you are likely to discourage any challenges to your Will - challenges that can be extremely costly.

If you require further information on sequencing risk, please reach out to your local RSM financial adviser. 

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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