Should you plan to give or receive an inheritance?


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 has 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 its 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 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 share holding. 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. In this case, it might be advisable to engage their accountant to do this or move their investments onto a wrap platform as it will manage all tax reporting obligations.

(B) Planning to leave an inheritance 

This section discusses the matters you may need to consider if you would like to leave some money to your beneficiaries or suspect that you won’t spend all your wealth in retirement.

Look after yourself first

Often clients tell me that they would like to be in the position to help their children in the future such as helping them buy their first home. This can be one of their main motivations for building their personal wealth.

The challenge with planning for this event is that it is often unclear which child will need what help at what time. Therefore, my advice is to look after themselves first and foremost. That is, take all reasonable steps to maximise their own personal wealth. If they do that and put themselves in a very strong financial position, then there will be lots of opportunities available to them to help their children in the future. 

Most inheritance is received too late in life

The average age that people receive an inheritance is 52. By this age, most people have already bought their first home, managed to get their mortgage under control and are very well established. In one sense, most inherences are received too late in life. Therefore, it makes sense to consider gifting monies to your beneficiary’s whist you are still alive.

I have always thought that struggling to buy your first home is a rite of passage. It teaches people the value of saving, delayed gratification, cash flow management, the power of compounding growth and so on. If you agree with this, then you’ll also agree that it’s good to help our kids, but not help them too much – we don’t want to make it too easy, or they won’t benefit from this important life experience.

If you do make gifts whilst you are alive, you should ensure that an offset clause is included in your will. This will allow your executor to take into account the gifts you have already made to even up the distribution of your remaining estate fairly.

And of course, it’s important to have a well-thought-out financial plan to ensure you aren’t giving away too much money, too soon and putting your own retirement at risk.

How to avoid family conflict

The risk of family conflict is very difficult to predict. As I said above, family and money rarely mix well. But there are some things you can do to minimise this risk.

Firstly, be as open as you can about your plans and wishes. If one party is excluded from your will, or will receive less, its best to be upfront about it with them and share your reasonings.

Secondly, it is much better to give money away whilst you are still alive. That way you are in control and can deal with any conflict that may arise. You also will enjoy seeing how your gifts help your beneficiaries.

Finally, if the risk of conflict is high, keep assets out of your personal name and therefore out of your estate. There are few options to achieve this such as using a family discretionary trust, owning property in joint names (as ownership automatically passes to the remaining joint tenants upon death) and nominating specific people in your super fund’s death benefit nomination form i.e., not your estate or personal legal representative.

Of course, if you have financial complexity, it is best that you obtain personalised financial and legal advice.

A huge transfer of intergenerational wealth

Over the next 20+ years, there is going to be a huge transfer of intergenerational wealth. This will create planning opportunities for those receiving this wealth, as well as opportunities to pass remaining wealth onto future generations. Professional management will minimise risk and ensure wealth is maximised.