What to do with an inheritance?

Receiving an inheritance or life insurance benefit after someone close to you passes away is generally a good thing, but it can also come with complications.

The key is to take it slow: don’t rush into any big decisions while you’re still processing and healing. Then, when you’re ready, you can start to think about how you’d like to use your windfall.

This article will explore options for what to do with inheritance money in Australia, to help you make informed choices for your financial future.

 

1) Seek professional financial advice

If you’ve recently received inheritance money and you’re not sure what your next step should be, a financial adviser can help. Not only can professionals share their knowledge and experience with you, but they can also act as an impartial guide to help you navigate your way through any confusion or uncertainty.

A good financial planner will listen to your goals for the future, and help you create a roadmap that will point you in the right direction. Whether you want to buy your first home or prepare for a comfortable retirement, a certified finance professional can suggest ways to invest your inheritance and grow your wealth.

This is especially important if you inherit a family home, as there can be capital gains tax consequences if you decide to sell it or use it to generate rental income.

A recent study about where Australians get their financial advice revealed that most Australians aren’t seeking advice from a professional resource. While there’s nothing wrong with turning to family and friends for financial advice, inheritance investments and taxation often require specialist knowledge.

Here are some resources that can help you find a good financial adviser:

• Moneysmart – an Australian government initiative – is a good place to start. Their guide to choosing a financial advisor has lots of helpful information for finding an experienced finance professional.
• The Financial Advice Association Australia (FAAA) also has a useful tool for finding a financial planner near you.

You could also think about utilising Wealth Maximiser, a NobleOak initiative, which provides an affordable alternative to traditional financial advice and can help provide advice on some of the best ways to utilise your inheritance and maximise your wealth.

 

2) Pay off outstanding debts

Paying down any debts you might have is one of the most common ways people choose to spend a monetary inheritance. If you have any high-interest debts such as personal loans or credit cards, an inheritance can make a big difference.

Many people also use their inheritance to reduce their mortgage. This is often a financially sound choice, especially if you still have a lot owing on your mortgage. By paying down your principal, you’ll reduce interest repayments over the term of your loan.

Just remember that debt isn’t always a bad thing – when managed wisely, it can help to accelerate wealth generation. The key is to think strategically about how you can use the inheritance to enhance your financial position.

 

3) Invest in property and shares

If you’re wondering what to do with a big inheritance, investing in property or building a share portfolio are two options that can advance your financial position.

Although making a major investment may seem daunting, if done right, this is a great way to build long-term wealth. Aside from investing in stocks or real estate, you might also like to consider a managed fund, or perhaps even investing in a business venture.

Of course, it’s essential to conduct research and get some professional financial advice before you make a decision. Investments can go down as well as up and in the worst case you can lose your entire investment.

 

4) Boost your super

Increasing your retirement savings by making a voluntary contribution to your super is a great way to prepare for your future.

In Australia, the average age of an inheritance recipient is about 50 years old (according to a report featured in the Australian Financial Review). People in this demographic are generally fairly well-established financially – which is why many choose to use inheritance money to boost their superannuation.

There are limits to the amounts by which you can top up your superannuation in a tax effective manner.

For more information, visit the Australian Government’s article about adding to your super and Moneysmart’s guide to super contributions or speak to an accountant.

 

5) Create an emergency fund

Creating an emergency fund provides a financial safety net that can protect against unforeseen expenses and financial hardships. An emergency fund ensures that you have readily accessible money to cover unexpected events such as medical emergencies, job loss, car repairs, or urgent home maintenance.

Moreover, having an emergency fund in place can provide peace of mind and financial stability, allowing you to make more thoughtful and less pressured financial decisions in other areas of your life. It serves as a buffer that helps maintain your standard of living during tough times and allows you to focus on long-term financial goals.

 

6) Consider helping your family

Many Australians deciding what to do with an inheritance often end up helping people in their family. By using your inheritance windfall to support other family members – for example with medical bills, housing costs, or other debts, or simply as a gift – you can honour the person who gave you the inheritance whilst strengthening family bonds.

Another thoughtful way to use your inheritance is by taking out life insurance products. This ensures your family is better off if the worst were to happen. By securing life cover, you can provide financial stability and peace of mind for your loved ones, ensuring they are protected in the future if the worst were to happen to you.

 

7) Treat yourself

There’s nothing wrong with using your inheritance to treat yourself to something nice – even more so if it’s something you genuinely need, such as a new car or computer. Aside from material goodies, you can also use the inheritance to invest in your future by enrolling in a course that will help your career, or perhaps embarking on a new business venture.

Be mindful, however, that once the money’s gone, it’s gone. The key here is to spend wisely, with the view to advancing your position in some way, rather than just splurging. Think carefully, plan thoroughly, and seek advice – by making the right decisions, you might be able to unlock an exciting new chapter in your life.

 

What should you not do with an inheritance?

Now that we’ve covered what to do with an inheritance, it’s time to list some classic pitfalls. Because while it’s okay to do a little bit of luxury spending, you don’t want to do anything that could actually leave you in a worse financial position.

Here are some things to avoid when spending a monetary inheritance:

• Impulse purchases: While a Ferrari might seem like a good investment, you need to consider ongoing expenses such as insurance and maintenance. Investment cars are usually rarely driven so if you do buy a Ferrari as an investment, it won’t be a commuter car. Take some time to think about what you really need before racing to the shops with a bulging wallet.
• Ignoring debt: Paying bills isn’t fun, but it’s necessary. Attend to your debt first, before you embark on a spending spree.
• Being unaware of taxes: When your financial position suddenly changes, this can have tax implications. You’ll also need to do your research on tax rates before making investments. If in doubt, talk to an accountant or financial adviser.
• High-risk investments: You should steer clear of speculative or high-risk investments without proper research, understanding, and expertise.

Remember, if it’s too good to be true, it probably is! Too good to be true | ACCC

 

Common inheritance FAQs

In this section we’ll provide answers to some of the most commonly asked questions about what to do with an inheritance:

What is considered a large inheritance?

According to an article published by the Australian Financial Review, the perceived size of an inheritance often depends on the recipient’s financial background. Citing data from inheritance amounts in 2019, $719,000 was the average for Australia’s wealthiest families, whilst the poorest families reported an average inheritance of $9,700.

Although $719,000 might seem like a large amount of money, for someone who is already wealthy, it might not be regarded as especially significant. Conversely, to someone on a very low income, $9,700 could be a game changer.

In terms of what to do with a big inheritance, this same article stated that around 30% of recipients choose to invest it and 28% use it to pay off their mortgage. Other choices include buying a car, putting it into a term deposit, and going on a holiday.

Where should you deposit your inheritance?

If you’re just about to receive a windfall inheritance, you can plan to have it deposited into a savings account. In most instances, this is a safe place to keep the money until you’ve had enough time to decide what you want to do with it.

You might also want to look into putting the money into a term deposit. This is where you deposit a fixed sum of money (with a bank or financial institution) for a specified period, earning a predetermined interest rate (which is higher than a standard account) for the duration of the term. If you need to withdraw the money early, you may have to pay a penalty or a fee.

Although savings accounts and term deposits with Australian banks don’t offer the same returns as some other forms of investment (such as shares), they are low-risk options.

Do you have to pay tax on inheritance money?

There is no inheritance tax in Australia; however, beneficiaries may still be subject to taxes on certain aspects of the inherited assets. For instance, if you receive income from the inheritance, such as interest from a bank account or dividends from shares, this income is generally taxable. Additionally, if you sell an inherited asset, you may be liable for capital gains tax (CGT) on any increase in value since the date of the original owner’s death.

It’s advisable to consult with a tax professional to understand the specific tax implications of your inheritance.

Useful information about tax law can also be found in these guides:

• If you are a beneficiary of a deceased estate (Australian Tax Office)
• Inherited property and CGT (Australian Tax Office)
• Do you pay tax on inheritance in Australia? (Forbes)

Do you need to declare inheritance?

In Australia, you generally don’t need to declare the inheritance itself on your tax return because there is no inheritance tax. However, any income generated from the inherited assets must be declared. For example, if you inherit a property and later sell it, you may be liable for capital gains tax (CGT) on the profit made from the sale.Similarly, if you inherit shares or cash that generate interest or dividends, this income must be reported on your tax return and is subject to income tax.

It’s important to keep detailed records of the value of the inherited assets at the time of the benefactor’s death, as this information will be needed for calculating any potential CGT if the assets are sold in the future.

What happens if I inherit a house instead of money?

If you inherit a house instead of money, the immediate tax implications are generally minimal. However, you will need to consider several factors. If you decide to keep the house and live in it, it becomes your primary residence, and you typically won’t face any immediate tax consequences. If you rent it out, the rental income must be declared on your tax return, and you may be able to claim deductions for expenses related to the property. Should you choose to sell the inherited house, you might be liable for capital gains tax (CGT) on the profit made from the sale. The CGT is calculated based on the difference between the sale price and the property’s market value at the date of the original owner’s death. To accurately determine your tax obligations and potential deductions, it’s advisable to consult a tax professional.

 

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Receiving an inheritance can make a profound change to your financial situation. Not only does it affect you, but it also affects your family. If you want to keep your loved ones supported if you were to become unwell or pass away, it may be worth considering life insurance products and NobleOak’s award winning cover. Our insurance calculator can help to determine the amount of cover you may need in 5 easy steps. Start a quote today to explore your insurance options with NobleOak.