To what extent should you factor in an inheritance? 


In 2017, Griffith University estimated Australians would pass on a staggering $3.5 trillion in wealth over the next two decades. It is estimated that around $10 billion is inherited every month in Australia, and the numbers are steadily increasing. 

Given these projections, it’s highly probable that many of you reading this blog will receive an inheritance at some point in your life. This raises an important question: How much should you consider incorporating this inheritance into your investment strategies? And what other factors should you consider?  

Planning involves making realistic assumptions  

When developing a long-term investment strategy, we must make several assumptions. Predicting the future can be tricky, but we do our best to make informed estimates. It’s crucial that these assumptions strike a balance between being conservative enough to be prudent, yet not overly cautious to the point of being irrelevant. Inheritances are no exception to this rule.  

While some may be certain of receiving an inheritance, it’s a personal decision whether to factor it into one’s plans. Personally, I lean towards a conservative approach, opting not to include potential inheritances when developing long-term strategies. If a client does end up inheriting, it’s a welcome bonus.  

Relying on an inheritance can carry risks, particularly if the benefactor is young and in good health. There’s always the chance that the expected inheritance may not materialise, due to spending more than anticipated, unforeseen circumstances or poor investment decisions. Naturally, the outcome depends on various factors such as the size of the estate and how it’s managed. If the estate is large and invested prudently, its likely beneficiaries will receive some inheritance.  

If I do need to rely on receiving an inheritance to make the strategy work, I adopt an extremely conservative stance. This caution would be amplified if the benefactor is relatively young, as there’s more uncertainty regarding their longevity and financial decisions. 

How might it change your investment strategy?  

If we were to include a future inheritance receipt when formulating a strategy, it may affect the investment strategy in the following ways: 

  • A common financial goal is to repay the home loan a few years prior to the planned retirement date. Of course, this means we need to allocate cash flow to achieve that, which means we invest less. However, an inheritance receipt could be our home loan repayment strategy, thereby allowing clients to either spend more on a family home (i.e., buy in a better location) or allocate their cash flow towards investing.  
  • Another common financial goal is to decrease investment debt to a point where a property portfolio is nearly neutrally geared. The aim is to avoid large negative cash flows from the property portfolio during retirement. To accomplish this, we may need to allocate cash flow towards debt reduction, such as placing cash in offset accounts. However, if we factor in an inheritance, perhaps we don’t need to prioritise debt reduction as much. 
  • Although we may not explicitly include an inheritance in our financial projections, we can keep it in the back of our minds. For example, we might be more open to pursuing a slightly higher-risk investment strategy, especially if there’s a strong likelihood of receiving an inheritance. 

When deciding how much weight to give to an inheritance in our planning, we’ll primarily consider factors such as the benefactor’s life expectancy, the estate’s value, and the assets it comprises. 

What should you do if you are about to receive an inheritance?  

Depending on the value of the inheritance and the assets involved, seeking financial and/or tax advice may be necessary. 

The first step is to check if the deceased’s will includes a testamentary trust. If it does, it often presents opportunities for tax benefits that we may want to leverage. 

In terms of taxation consequences, if the estate sells assets and distributes cash to beneficiaries, the estate bears the tax liabilities. However, if the estate distributes assets to beneficiaries, the beneficiary inherits the tax characteristics (including cost base) of those assets. Determining the most tax-efficient option depends on many factors including any carried forward income or capital losses, the tax position of each party involved, and whether a testamentary trust exists. 

What to do with an inheritance  

Once you have worked out how to best receive the inheritance, it’s time to think about what to do with it. Some options to consider include:  

  • Retaining assets within the testamentary trust for the benefit of future generations. If these assets are surplus to your needs, there’s likely no need to withdraw them from the trust, especially if you can tax-effectively distribute income to multiple family members, you may be able to reduce the tax to nil. If the portfolio lacks diversification, engaging a financial advisor to manage it could prove beneficial. 
  • Transferring funds into superannuation can be highly advantageous, particularly given that individuals can have up to $1.9 million without incurring any tax. From 1 July 2024, the non-concessional contribution limit will rise to $120,000 per person. Moreover, individuals have the option to bring forward two years’ worth of contribution caps if desired. Consequently, an individual could contribute $120,000 before 30 June 2025 and an additional $360,000 on 1 July 2025, totalling $470,000. 
  • If you are highly leveraged, you might like to use some or all of your inheritance to reduce debt, especially non-tax-deductible debt. This is particularly attractive at current interest rate settings.  

You can’t take it with you… 

In my experience, most adult children encourage their parents to enjoy their wealth while they’re still in good health. “Dying With Zero” was a widely discussed book that advocated for enjoying all of one’s wealth.  

However, despite these efforts, receiving an inheritance is still a high probability. Therefore, it likely makes sense to consider it in your plans, even if it means serving as a steward of the wealth, maximising it for future generations. 

How have you factored potential inheritance into your plans?  

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