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By Ken Raiss
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I’ve just received an inheritance windfall, what do I do next?

Receiving an inheritance can be a life-changing event, but also one filled with heightened emotions and uncertainty about the implications on your financial future.

While receiving a lump sum of money can be a great opportunity to strengthen your finances, the sudden increase in your wealth also requires some careful consideration and planning.

So, whether you inherit financial assets, proceeds from superannuation, property or anything else, it's vital that you understand the tax implications of your new financial situation and that you take the right steps from day one.

Here’s a guide about how to handle an inheritance windfall, and the crucial steps you should take.

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Step one: Pause and assess

The first thing you should do after receiving an inheritance, no matter what or how much it is, is to take a deliberate pause and allow yourself to grieve and process the emotions behind the new change in your financial situation.

Step two: Gather documents

Once you’ve had time to come to terms with the inheritance windfall, it's time to gather all relevant documents about it.

This includes the will, any details of assets such as cash, property or other investments, and any associated liabilities that come with the inheritance, such as a mortgage.

Step three: Establish your dream team

The next step, before making any decisions or actions, is to get some financial and wealth advice.

Inheritance is a complex area, so it is certainly valuable to get professional advice.

You’ll benefit from engaging with a ​ fiduciary adviser, which is a financial professional who is legally and ethically bound to act in the interest of their client.

The team at Metropole Wealth Advisory specialise in this area and can help coordinate the various consultants for you.

Step four: Do a financial health assessment

The team at Metropole Wealth Advisory can help you undertake a thorough assessment of your financial health, taking into account your income, expenses, any existing debt, your risk tolerance and your long-term goals.

The first step would generally be to address any existing debts, especially those with high interest, and to prioritise debt repayments which can save you from compounded interest costs in the long run.

This will not only free up future income for saving and investing but it will also help to improve your credit score, potentially leading to lower interest rates on future loans.

You’ll then likely be advised to set up an emergency financial buffer, the size of which will vary depending on your potential personal circumstances if you haven’t already done so.

Once this assessment is completed you and your adviser can look at what is the next best way to manage the new asset.

Step five: Understand the tax implications

The good news is that there is no tax imposed on the transfer of most inherited assets from an estate distribution in Australia, but there may be tax implications on what you do with those assets.

It would be valuable to consult with a tax adviser at this point to help you navigate the tax implications for your situation, and to ensure you comply with any regulations.

  • Income tax: If your inherited assets generate income, such as dividends from shares or rental income from property, this income is taxable at your marginal rate. You can deduct any eligible property expenses to reduce the amount of tax payable in the event of rental income.
  • Capital gains tax (CGT): You may be liable to pay CGT when you sell an inherited asset, either when you receive it or in the future. The tax is based on the difference between the property's market value at the time of inheritance and the sale price. It's crucial to get a property valuation at the time of inheritance to accurately calculate potential CGT. There are also special rules regarding what may have previously been a family home.
  • Superannuation death benefit tax: An inherited superannuation death benefit may also be applicable depending on a range of factors, including your age, your relationship to the deceased person, whether it comes in a lump sum or as an income and whether the super payment has taxable components or not. The are different tax treatments depending on who receives a superannuation death benefit.

Inheritance Tax

Step six: Decide what to do with your inheritance windfall

Once you've addressed your financial obligations, you’ll need to decide what to do next with your inheritance.

This is a good time to review your investment strategy with an independent financial and wealth adviser.

An adviser can help you decide how to use or most tax-effectively invest these funds to meet both your current needs and future goals.

Generally, you have 3 options - you can invest it, put it into your superannuation or use it to begin or revise your own estate planning.

Investing your inheritance

One option is to explore investment avenues for long-term wealth creation.

Professional advice is obviously critical at this stage also.

You’ll need to consider things like long-term capital growth prospects, ongoing costs and your risk appetite.

You can invest in property, stocks or shares, managed funds or ETFs or bonds and fixed income to name a few.

Property investments offer long-term capital growth and attractive rental yields, while bonds and fixed income offer a more stable investment option.

Diversification is key here.

Spreading your inheritance across various asset classes, or even across a range of options within one asset class (such as location and property type of property investments), can help to mitigate risk.

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Putting your inheritance into your superannuation

Why is it tax-effective?

Because the funds won’t be taxed when you put them in your superfund and earnings on that investment will be taxed at the low rate of 15% (and will be tax-free when you reach the retirement phase) and 10% on any capital gains before pension stage at which time the tax rates are nil.

But warning: Be aware of the concessional contribution cap.

The non-concessional contributions cap is the maximum amount of after-tax contributions you can contribute to your super each year without contributions being subject to extra tax.

From 1 July 2021, the non-concessional contributions cap is $110,000, although this is reviewed annually to remain in line with average weekly ordinary time earnings.

So the catch is, if you contribute more, you may have to pay extra tax.

Using your inheritance for estate planning

The other alternative, especially if your current financial situation and investment portfolio are robust, is that you can use your inheritance to either begin or revise your own estate planning for your own children or grandchildren.

Estate planning involves arranging your assets and circumstances in such a way that you can ensure that your beneficiaries (the people you leave your wealth to) receive your assets after your death in a way that enables maximum use and enjoyment at a minimum cost and heartache.

This can be property, shares, a bank account and any personal assets.

Creating wills and trusts, establishing enduring powers of attorney, and making thoughtful arrangements for the future management and ownership of real estate are critical components of a solid estate plan.

These steps protect the financial value of the assets and the emotional investment families have in their properties.

Ultimately, thorough estate planning is about safeguarding the future, ensuring one's wishes are respected, and minimising the burden on loved ones during challenging times.

Again, it’s vital to get professional advice here about the best and most tax-effective way to plan your estate and pass on your wealth to your beneficiaries.

Remember, once you have an estate plan in place, you need to regularly review it to ensure that it continues to meet your goals and is suited to your individual circumstances and market conditions.

Real Estate Plan

Donate your inheritance to charity

Another bonus option which some might want to consider, is donating some funds to charity as part of your investment strategy.

This not only can be personally fulfilling but also offers excellent tax deductions.

That’s because, in Australia, gifts and inheritances are generally not considered as income and aren't liable to tax.

That means that all tax-deductible gifts over $2 to registered Deductible Gift Recipients (DGR) can be taken off your taxable income for the year.

Remember, there’s no one-size-fits-all approach

Your financial situation, goals, and risk tolerance are unique so you need to tailor your decisions to create a personalised roadmap to financial security.

The key though is to get good independent financial advice and devise strategies to plan how you will use the inherited assets.

Then you can plan your own will and estate to ensure that when the time does come, things run as smoothly and as stress-free as possible for all involved.

Finally, by understanding the tax implications, investing wisely, and seeking professional advice along the way, you can ensure that any inheritance you receive is put to the best possible use.

And ultimately, with the right advice and taking the right steps, it can help you secure your own financial security and growth.

At Metropole Wealth Advisory we provide tailored strategic wealth advice for high-net-worth individuals and their families, professionals and business owners.

We are a unique team of wealth creation, asset protection, tax, property and business specialists, the likes of which you probably have never come across before.

While our team is small we punch above our weight in terms of the value.

And we work closely with a faculty of specialists who are all experts in their field.

Click here now and leave us your details and let’s have an obligation-free chat to see how we can help you.

About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles
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