What to do (and what to avoid) when you receive an inheritance

Many of us will receive an inheritance in our lifetime, and some of us are relying on it. According to Vanguard’s How Australia Retires report, 21 per cent of working-age Australians plan to use an inheritance to contribute to their retirement income.

Yet receiving an inheritance, be it cash or other assets, often catches us off guard. Some of us – understandably – avoid thinking about the practical implications of inheriting before the event because doing so would also involve thinking about the death of a loved one.

For others, an inheritance may represent the largest sum of money or most valuable asset they have ever received, bringing with it strong and conflicting emotions, such as anxiety and excitement.

“I would strongly encourage anyone due to receive an inheritance to seek financial advice,” says Suzanne Jones, partner and head of estate planning at Coote Family Lawyers. “Everyone’s circumstances are different, so it is important to seek out information that is relevant to you.”

In the meantime, here are four steps, suggested by Jones and other experts, to help you make sense of inheriting so that you are better prepared when your windfall arrives.

1. Consider the tax implications

There are no inheritance or estate taxes in Australia, and cash inheritances do not need to be declared as income. But many inheritances consist of other assets, such as property or shares, which may attract capital gains tax (CGT) if the inheritor sells them.

“The capital gains tax implications vary depending on your relationship with the deceased and how the asset was used during their life,” Jones says. “For some, instructing the estate’s executor to sell the asset, pay the tax and transfer the balance in cash may be preferable.”

In other instances, the deceased’s will may instruct the executor to establish a testamentary trust, or give the inheritor the option to establish one.

Testamentary trusts manage assets of the deceased and pay any income derived from them to nominated beneficiaries. The income is at present taxed at the beneficiary’s personal marginal tax rate, but this could change to a 30 per cent minimum tax rate by July next year if the government’s recent budget changes pass into law.

‘This is a stressful event, and our brains don’t operate as well when we are under stress, so our decision-making can become impaired.’

Natallia Smith, psychologist and director of TruWealth Advice.

2. Be aware of the potential for claims

If a relative or significant person in the deceased’s life believes they have not been properly accounted for in the will, they may be able to make a legal claim for assets, known as a Family Provision Claim. If such a claim is successful, it may reduce the size of your inheritance.

The window for lodging a Family Provision Claim varies from state to state, Jones notes. “In Victoria, an eligible claimant has six months from the date probate is granted. In NSW, it’s a year from the date of death.”

Usually, an executor will not distribute the contents of an estate until the claim window has elapsed, but there is no requirement to wait. That means you may need to return assets if a successful claim is made after you receive them.

3. Think of an inheritance as income

Whether you receive an inheritance as assets, tax-free cash or taxable trust income, it’s natural to think of the windfall as something “extra” and ring-fence it from your overall finances.

But this framing can result in unwise decisions, says Natallia Smith, financial adviser, psychologist and director of TruWealth Advice. “It’s one of the reasons lottery winners often end up with no more money than they had in the first place,” she says.

Instead, absorb an inheritance into your overall financial position, as though you have earned it, and proceed accordingly, Smith says.

“Then you’re much more likely to make decisions that will benefit you in the long run. If you have a home loan, for example, you’d consider paying it off, or perhaps you’d make a voluntary superannuation contribution.”

4. Don’t rush

Receiving an inheritance can reignite grief, Smith says, prompting some inheritors to deal with the inheritance quickly in the hope that the grief will subside.

For others, particularly those who receive large inheritances, internal pressure to allocate the windfall so it’s not “just sitting there” can quickly build, Smith says.

“It’s important to recognise that this is a stressful event, and our brains don’t operate as well when we are under stress, so our decision-making can become impaired.”

Smith advises delaying decision-making until any intense emotional responses have subsided. “That will give you a better chance of really understanding the implications of what you have received before you commit to anything.”

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.

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This story was created in partnership with Vanguard. The content is independent of any influence by the commercial partner.