Real Estate Investment:Today

Here’s what you need to do if you’re planning to give or receive an inheritance?

Key takeaways

Baby boomers are expected to leave $224 billion in inheritances to the next generation over the next two decades, representing a fourfold increase in the value of inheritances over the next 30 years.

When developing your personal financial plan, don’t rely on receiving an inheritance. Circumstances can quickly change.

If there is a risk of conflict between potential beneficiaries, you might not receive what you expect or be involved in a long legal battle. You may want to factor inheritance into your financial plan if you are confident you will receive an inheritance.

It is preferred to receive all inheritance via a testamentary trust, which can distribute to minors and is taxed at adult tax rates. It can also be used for gift making and provides asset protection.

If you expect to receive an inheritance, check with the benefactor’s will to see if it includes a testamentary trust.

A lot has been written about the good fortune of ‘baby boomers’ in that, overall, they have enjoyed a long period of economic, share market, and property market prosperity.

Whilst they haven’t enjoyed the full benefit of compulsory super (which only began in 1992), other assets such as property have certainly compensated for that.

This means an inheritance tsunami will hit the next generation over the next two decades.

Baby Boomers are expected to bequeath $224 billion each year in inheritance by 2050, representing a fourfold increase in the value of inheritances over the next 30 years.

This creates a huge financial planning opportunity for many families.

At the same time, it invites you to think about the value of assets that you plan to leave your beneficiaries.


(A) Planning to receive an inheritance

There are many factors that you must consider if there’s a chance that you may receive an inheritance.

Do not rely on it, but certainly plan for it

The size of any potential inheritance and your family’s circumstances will typically determine whether it’s prudent to rely on receiving an inheritance when developing your personal financial plan.

Whilst you might expect to receive an inheritance, we all know that circumstances can quickly change.

For example, the expected benefactors (often parents) might end up spending all their money or losing it (poor investments) or changing their mind and leaving it all to charity.

Anything can happen.

You also must consider your family’s circumstances.

If there’s a risk of conflict (between potential beneficiaries) then it’s possible you may not receive what you expect or you may be involved in a long legal battle.

Any experienced estate lawyer will tell you how often money issues upset and ruin otherwise well-functioning and happy families.

Money and family rarely mix well.

How can you factor it into your plans?

If you are confident that you will receive an inheritance and that you are unlikely to experience any family conflict, then you may take this into account in your own financial plan.

For example, you might be comfortable borrowing additional monies to invest on the assumption that the inherence will assist you in repaying or reducing this debt when you retire.

Or perhaps you might prioritise your lifestyle expenditure now (and invest less).

I must say that I am often reluctant to include inheritance when developing a financial plan for my clients because it is just so uncertain – anything can change.

If possible, I prefer to develop a strategy that does not consider inheritance and treat it as “icing on the cake” if it’s ever received.


Receive it tax-effectively

Typically, I prefer my clients to receive all inheritance via a testamentary trust.

For this to be an option, a testamentary trust must be included in the benefactor’s will.

A testamentary trust offers a few advantages.

Firstly, it can distribute to minors (your children or grandchildren that are less than 18 years old) and the income or capital gains are taxed at adult tax rates, which means each child can effectively receive circa $20,000 p.a. without paying any tax.

This can be a great tax planning tool.

Secondly, as it’s a discretionary trust, it provides a lot of flexibility as to how income and capital gains are to be distributed which means it’s a good gift-making vehicle.

And finally, it provides a level of asset protection for the recipients.

If you expect to receive an inheritance you need to check with the benefactor whether their will includes a testamentary trust.

This can be a delicate conversation and one that is not always possible to have.

Sometimes referring them to a good estate planning lawyer can be a good way to indirectly deal with this issue.

Record keeping can create nightmares – try to get in front of this issue if you can

It is not uncommon for a client to receive an inheritance from a family member that has owned direct Australian shares for many decades e.g., they purchased CBA or BHP shares when they were listed (IPO).

If the investor hasn’t maintained good records over many decades, it can make it very difficult for my clients to work out the tax cost base for each shareholding.

It is possible to access share registry information, but it can be time-consuming to piece all this information together.

Therefore, if you have a family member in this situation, realise that they may struggle to maintain good records as they get older.

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