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The Role of Financial Advisers in Managing Your Inheritance

June 9, 2023 | Financial Advice

Generational wealth transfers are growing in Australia. According to the Australian Financial Review, Australia is about to experience its largest intergenerational wealth transfer – $3.5 trillion over the next two decades. By 2050, Baby Boomers are expected to leave $224 billion in inheritances to their Millennial and Gen Z beneficiaries each year.

Receiving an inheritance is like winning the lottery. But just like any lottery winner will tell you, if you’re not careful, that sudden wealth can disappear just as quickly as it arrived. In fact, the common ‘curse’ of the family fortune being lost within three generations is known the world over, spawning the Chinese proverb “wealth doesn’t pass three generations” and the English saying “from shirtsleeves to shirtsleeves in three generations.”

That’s where a financial adviser can come in. The role of financial advisers in managing your inheritance includes:

  • Helping you understand your financial situation and goals.
  • Developing a plan to reach your goals.
  • Helping you choose investments that are appropriate for your risk tolerance and goals.
  • Helping you with tax-effective measures.
  • Providing ongoing support and guidance.

Understanding Inherited Wealth

Inherited wealth is money or assets that you receive from your family or loved ones when they pass away. It can come in many forms, such as cash, property, investments, or even businesses.

Inheriting wealth and managing your inheritance can have a big impact on your financial situation, such as paying off high-interest debts, saving for a nest egg, funding your needs and wants, or starting a business.

However, managing inheritance is a balancing act between long-term financial security and short-term happiness. It is important to be smart with your money and make wise financial decisions. Here are some key points for you to consider as a starting point for managing your inheritance:

  • Spend some time considering your goals. What are your plans for the money? Do you wish to invest in the future, save for retirement, or reduce your debt with it? You can begin developing a strategy after you are clear on what you want to do with the funds.
  • Don’t spend it all at once. When you inherit a lot of money, it can be tempting to indulge in excessive spending and feed the ‘instant gratification monster’. But it’s crucial to hold back the urge and exercise patience. Consider carefully what you want to purchase with the money.
  • Keep your tax position in mind. The wealth that is inherited might be taxed. Make sure to speak with a tax professional to determine your tax liability.
  • Protect your assets. You may become a victim of fraud and identity theft if you have inherited wealth. Take precautions to safeguard your possessions, such as creating a trust or utilising a Will.
  • Consult a professional. Get professional advice from a financial adviser if you’re unsure about how to handle receiving an inheritance. They can assist you in developing a strategy that takes into account your specific needs and goals.

Financial Advice for Managing Your Inheritance

When receiving an inheritance, it is critical to define and prioritise your financial goals. By doing so, you can plan how to capitalise on your inheritance and ensure that it is used to achieve your personal goals.

Paying off debt, retirement planning, buying a home, and making future investments are all popular financial goals.

Once you’ve identified what your financial goals are, you can prioritise them. Some objectives may be more important to you than others. For example, if you’re approaching retirement age, saving for your nest egg may be your main priority. Alternatively, saving for your children’s education is especially vital if you have young children.

After you’ve selected your goals, you can start planning how you’ll invest your inheritance in order to achieve them. This may entail collaborating with an experienced financial adviser to create a complete financial plan tailored to your needs.

Developing a Comprehensive Financial Plan

Developing a comprehensive financial plan can be a daunting task, but it’s worth the effort. By following these steps, you can ensure that you’re on track to achieve your financial goals.

What makes a comprehensive financial plan?

1. Budgeting and cash flow management

Budgeting is the process of tracking your income and expenses. It helps you identify areas where you can cut back on spending and save more money. Use this free online budget tool to see how you spend your money on a weekly, monthly, or yearly basis.

Cash flow management is the process of ensuring that you have enough money to cover your expenses regularly. It helps you avoid debt and financial hardship. Here’s a free online expenses planner calculator that gives you a bird’s-eye view of your living expenses and other costs.

Budgeting and cash flow management help ensure that you live within your means and have the necessary funds to achieve your financial goals. It also helps to keep you on track and can motivate you to not squander your inheritance away on unnecessary or frivolous purchases but rather invest in a better long-term lifestyle for you and your family.

2. Investment strategy and asset allocation

Investment strategy includes deciding what types of investments to make, how much risk to take, and when to sell your investments. Your investment strategy should align with your risk tolerance, time horizon, and financial objectives.

Asset allocation involves diversifying your investments across different asset classes (e.g., shares, bonds, real estate) to spread risk and potentially increase returns.

Developing an investment strategy and determining asset allocation can help grow your wealth, protect against inflation, and provide income during retirement, ensuring you capitalise on the windfall you have received.

3. Risk management and insurance coverage

Risk management is the process of identifying and reducing your financial risks. This can be done through insurance, diversification, and other financial planning strategies.

Adequate insurance coverage plays a significant role in risk management. Insurance policies, such as life insurance, disability insurance, and income protection, protect against unforeseen events and financial hardships. Having the right insurance coverage ensures that you and your family are financially protected in the event of emergencies, illnesses, accidents, or death, enabling your inheritance to be utilised to grow your wealth instead of helping you to survive.

4. Estate planning and legacy considerations

Estate planning involves preparing for the distribution of your assets and the management of your affairs after you die. It includes creating a Will, appointing a guardian for your children, and setting up trusts. It allows you to ensure that your assets are distributed according to your wishes and minimises potential disputes or tax implications.

Legacy considerations are what you want to leave behind after you die. It includes your possessions, your values, and your memories. Planning for your legacy allows you to leave a lasting impact, support causes you to care about, and propel the intergenerational transfer onto the next generation.

Maximising the Value of Inherited Wealth

Maximising the value of inherited wealth involves identifying the taxes that come with it, evaluating existing investments, and optimising investments through diversification and risk management.

Tax Considerations and Strategies

In New South Wales and Australia, there are no specific inheritance and estate taxes at the state and federal levels. However, other taxes and duties may apply, such as probate fees, capital gains and income taxes, and stamp duty on property transfers.

1. Probate Fees

A probate is a court order granted by the Supreme Court of NSW to confirm that a Will is valid and that the executor has permission to distribute the estate.

When applying for a grant of probate or letters of administration, you may be required to pay probate fees. These fees depend on the value of the estate. To minimise probate fees, you can engage in estate planning strategies to reduce the estate’s value or explore options to distribute assets without the need for probate.

2. Capital Gains and Income Taxes

The Australian Taxation Office (ATO) states that you may have tax obligations for being a beneficiary of a deceased estate in Australia.

If you sell an asset you inherited from a deceased estate, you may be liable to pay capital gains tax on the profit. The amount of capital gains tax you pay will depend on the amount of the profit and your marginal tax rate.

Likewise, if you receive income from an asset you inherited from a deceased estate, you need to declare this income on your tax return. If this happens, the estate’s legal personal representative (LPR) should supply you with tax return information. The amount of income tax you pay will depend on your marginal tax rate and the type of income.

If the deceased person had superannuation the trustee of the super fund will determine who receives benefits. Super paid after death is called a “super death benefit” and the tax on it depends on:

  • whether you were a tax dependant of the deceased
  • whether it is paid as a lump sum or income stream
  • whether the super is tax-free or taxable (and whether the super fund has already paid tax on the taxable component)
  • your age and the deceased’s age when they died (for income streams).

To learn about your entitlement, contact the super fund trustee directly.

3. Stamp Duty on Property Transfers

In NSW, a transfer duty with a concessional rate of $50 is available for property inherited from a deceased estate. The property must be inherited under the terms of the deceased person’s Will to qualify for this concession.

For example, if you inherit a property from your deceased parent, you will only pay $50 in stamp duty, regardless of the value of the property. However, if you buy the property from your deceased parent’s estate, you will pay transfer duty at the standard rate.

The concessional rate of transfer duty for inherited property is designed to make it easier for people to inherit property from deceased estates. It can also help to reduce the administrative burden on the legal personal representative (LPR) of the estate.

Diversification and Risk Management

Increasing the value of inherited wealth through diversification and risk management entails taking proactive efforts to safeguard and grow your assets. Consider your risk tolerance, explore other investments from financial institutions, and seek professional financial advice.

Determine your risk tolerance, which relates to your comfort level with taking risks in your investment portfolio. It’s critical to strike a balance between risk and potential returns that correspond to your financial goals and personal circumstances.

Don’t put all of your eggs in one basket. You can also invest in a variety of investment vehicles in Australia, such as managed funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), direct equity investments or shares, bonds, real estate, and cash. To reduce risk and maximise possible returns, consider diversifying your inherited cash among any of these many investment possibilities that are suitable for your portfolio.

It is also highly suggested that you consult with a professional financial adviser with knowledge in investment management and financial planning to ensure you make informed decisions and maximise the value of your inherited wealth.

Evaluate Existing Investments

Evaluating and optimising existing investments necessitates careful analysis, research, and professional guidance. Each investment should be weighed against your overall financial goals, risk tolerance, and time horizon.

Begin by carefully evaluating your current investment portfolio. Examine each investment’s performance, risk profile, and overall suitability. Understand the goals and objectives of each investment and how they relate to your own financial goals.

Examine the track record of each investment in your portfolio. Compare your results to applicable benchmarks and industry norms. Consider aspects including volatility, return consistency, and long-term growth potential. This study can assist you in identifying underperforming investments that may require reevaluation.

Engage the services of a certified financial adviser who can provide expert advice customised to your unique situation. They may assist you in evaluating your current investments, performing due diligence, assessing their strengths and weaknesses, and identifying opportunities for improvement.

Collaboration with Other Professionals

We mentioned the need to engage financial advisers with regard to managing your inheritance and investments, but other professionals can play a valuable role in helping individuals and families manage inherited wealth.

Estate Solicitors and Tax Advisers

Estate solicitors and tax advisers can assist you with legal and regulatory requirements, estate planning tools, reducing tax obligations, as well as asset protection and wealth transfer.

Why estate attorneys and tax advisors are important

Ensure compliance with legal and regulatory requirements: 

Estate attorneys help verify that your estate plan and wealth transfers conform to all legal requirements. This includes preparing a legitimate and complete Will, dealing with any intestacy (lack of a Will) difficulties, and, if necessary, navigating the probate procedure.

Trust structures and other estate planning tools: 

Trusts enable you to protect assets, reduce taxes, and ease money transfers to heirs. Trusts and other estate planning techniques can be customised by estate solicitors and tax consultants to protect and distribute your inheritance.

Reduce tax obligations: 

Tax consultants advise you on tax planning to minimise taxes on inherited wealth. They can help you understand income tax, capital gains tax (CGT), and other tax issues. They can optimise your tax position, utilise tax exemptions and deductions, and reduce tax payments on inherited assets. Thus reducing taxes and boosting your inheritance.

Asset protection and wealth transfer: 

Estate solicitors can help you set up trusts and other estate planning measures to shield inherited assets from creditors and lawsuits. They also help transfer wealth to beneficiaries. Estate solicitors help you construct successful estate plans specific to your asset distribution preferences and protect your beneficiaries’ finances.

Family Members and Beneficiaries

Managing inherited wealth involves coordinating with other family members and beneficiaries to help maintain family harmony and ensure the long-term success of managing the inherited wealth as a collective effort. It is important to foster an environment of trust and involve professional consultants such as financial advisers, estate solicitors, and accountants/tax advisers.

The importance of third parties in managing inherited wealth
  • Addressing potential conflicts involves open and honest communication, setting clear expectations, and seeking advice from a mediator or estate solicitor if necessary.
  • Facilitating communication involves setting channels of communication and encouraging regular dialogue about financial matters.
  • Collaborating on shared financial goals involves identifying common objectives such as preserving and growing inherited assets, funding education or charitable endeavours, or supporting family businesses.
  • Sharing responsibilities involves various responsibilities, such as investment management, tax planning, estate administration, and philanthropic endeavours.
  • Intergenerational wealth transfer requires coordinating with other family members and beneficiaries as it allows for the transfer of knowledge and ensures the preservation and continuation of the family’s financial legacy.

Monitoring and Adjusting the Financial Plan

Regular reviews and monitoring of inherited wealth are essential to ensure its continued growth and alignment with changing circumstances. It involves adapting the financial plan based on various factors, such as life events, market conditions, and economic factors.

Life events, market conditions, and economic considerations might affect your finances. These events may include marriage, children, career changes, or retirement. Market volatility, economic developments, and tax law changes also affect inherited wealth. Reviewing these elements often lets you adapt your financial plan to stay on target.

Over time, your financial goals may change or evolve.  Reviewing your inherited wealth lets you check if your goals are still relevant. You may want to buy a house, fund education, or give to charity. Your financial strategy should reflect your priorities, so review your goals. Adjusting asset allocation, investment choices, and risk management to meet your new goals is essential.

Ultimately, you may maximise the management and growth of your inherited wealth by keeping an eye on life events, market conditions, and economic factors, revising goals, and altering plans accordingly.

Are You Managing Your Inheritance Successfully?

Managing your inheritance is a complex task that requires careful planning and decision-making. To effectively manage inherited wealth, individuals must consider their goals and develop a financial plan that aligns with their aspirations.

Financial planning for inherited wealth involves a comprehensive approach that includes budgeting, cash flow management, investment strategy, risk management, insurance coverage, estate planning, and legacy considerations.

Collaboration with family members and beneficiaries, open communication, and the establishment of shared financial goals are essential for maintaining family harmony and ensuring the long-term success of managing inherited wealth.

Financial advisers play a crucial role in helping individuals navigate the complexities of managing inherited wealth.

Manage Your Inherited Wealth with Guidance from the Financial Advisers at Coastal Advice Group

When you receive your inheritance, it can seem complicated and overwhelming, but it doesn’t have to be that way with knowledge and expert guidance. Whether you’re young or old, it’s always a wise choice to effectively manage your inheritance and also prepare for the transfer of your wealth in case you pass away.

Need investment advice and estate planning advice? Coastal Advice Group is here to help you create a financial plan to build and protect your family’s wealth. Our expert financial advice team can help you establish direction for your wealth to achieve your financial and lifestyle goals.

Call us or book online to secure your consultation today!

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DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.