About to get your inheritance? Don’t start spending just yet

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You’ve probably heard this statistic bandied around a lot recently, but I’ll mention it one more time, mainly because it is so astounding: over the next 25 years, $3.5 trillion in wealth will be transferred from one generation to the next.

For context, that’s just (just!) $700 billion shy of the total value of all superannuation accounts currently in Australia. By any measure, it’s a phenomenal amount of money.

It’s good news for the Millennial/Gen Z/Gen Alpha crowd as the target recipients of much of this wealth, with many likely relying on it as the main way to get into the property market, or to give them the financial freedom to pursue a new career, help raise kids, etc.

The average inheritance size, according to a Productivity Commission study in 2019, is $125,000, with the average age to receive it being about 50 years old. However, a more recent study put that figure closer to $700,000 when property values are considered, and with the rise of “living inheritances”, the average age is likely moving down too.

What’s the problem?

This leaves us with a scenario where more and more money is being given to younger people, often with minimal planning or communication.

For many, it’s more money than they’ll ever have access to (at least until they can access their super). It’s a bit of a perfect storm, one which could lead to people spending their inheritance recklessly, or in a poorly though-out manner.

What you can do about it

So if you’re in line for a sizeable bequest, and you’re worried on how to spend it, read on:

• Take a beat: Before doing anything, do nothing. That’s the advice of Luisa Di Bernardo, managing associate and wills and estates lawyer at Armstrong Legal, who says she sees clients rush into things without thinking things through. “Grief and emotion can cloud judgement, but taking a few months before spending or ‘treating yourself’ will help avoid regret,” she says. For inheritance being passed on via will, wait until the estate is fully settled before making grand plans to spend your windfall, as you do not legally own the inheritance until that process is complete. “Even if your loved one has spoken about what they will give to you, and even if you are named in the will, until the estate has gone through probate and all estate debts, taxes and challenges are resolved, the inheritance is not legally secure,” Di Bernardo says. Taking this time will also help you get clear on exactly what your plans are for your inheritance. Adam Gringlas, managing director of Jadig Finance, warns acting too quickly can limit your ability to consider different investment opportunities. “I encourage anyone looking to invest their inheritance to take the time to understand the goal of their investment, the timeframe they are willing to work with, and the level of risk they are comfortable with,” he says.
• Don’t go wild: We’ve all heard the classic tale of the lottery winner who goes crazy spending their winnings on houses, parties and jetskis before finding themselves broke a year later. And while I’m not suggesting many people will spend their inheritances that way, it’s still a relevant cautionary tale. When people think “inheritance” their minds can often jump to a new house, new car, or other major expense, where in reality, it probably makes more sense to spend it conservatively. For example, using it to pay down your mortgage can leave you with more money in your pocket, which you can then put towards new exciting things (this applies to other debt like credit cards too). Making a non-concessional super contribution may also feel anticlimactic, but if you don’t need the money now it’s a great way to set yourself up for retirement, and grow the money you’re able to pass on to your own dependents. Think about some of the less obvious places to spend, rather than splashing it on new things that might end up putting you in more debt than before.
• Consider tax obligations: There is no inheritance tax in Australia (though perhaps there should be), but you will have to pay tax on the assets you inherit, most notably capital gains tax. You’ll need to pay this when you dispose of any inherited assets, and depending on their value or age, the amount can be quite significant. There can also be a tax on super death benefits if you are not a dependant, so it’s worth getting advice on this if you’re unsure, or you could end up paying more than you want to the tax office.
• Talk about it: Finally, if you’re lucky enough to be able to talk to your parents about your inheritance (be it early or otherwise), do so. It gives you both a chance to set some clear expectations about the amount and how it should be spent, and also head off any potential disagreements from other recipients. Money expert Noel Whittaker says in certain situations, you might even want to draft a “prenup for siblings”. “This means adult children agree in advance on who will value assets when the time comes, how discounts will apply, and how any sales will be handled,” he says.

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 own personal circumstances before making any financial decisions.