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Inheriting money can be a significant financial boost, but unfortunately, many people fail to use their inheritances wisely. According to finance expert Ben Nash, common mistakes often lead to squandered opportunities that don’t enhance long-term financial security. With Australia poised to undergo the largest intergenerational wealth transfer in history—estimated at $5.4 trillion over the next two decades—it’s crucial for beneficiaries to avoid these pitfalls.
Common Mistakes to Avoid with Inheritances
1. Prioritising Immediate Gratification Over Long-Term Growth
A frequent mistake is using inheritance funds for short-term pleasures, such as upgrading homes, settling mortgages, or funding holidays. While these expenditures provide immediate satisfaction, they do little to build lasting wealth. For instance, if one were to pay down a mortgage with a $300,000 inheritance, they might save on interest. However, this choice could prevent them from investing that money in an asset portfolio, which could generate substantial annual returns over time.
Solution: Consider how you can leverage the inherited money to expand your investment portfolio rather than solely enhancing your lifestyle.
2. Overlooking Tax Implications
Australia does not impose inheritance tax, but tax considerations surrounding assets bequeathed can be significant, particularly with superannuation. When adult children inherit superannuation funds, they might face tax rates as high as 32% on amounts exceeding the tax-free threshold. For example, inheriting $500,000 could mean a tax hit of up to $160,000.
Solution: Proper planning, such as withdrawing and recontributing superannuation while the benefactor is still alive, can convert taxable amounts into tax-free inheritances. Having conversations with family members about their superannuation can help avoid hefty tax burdens.
3. Neglecting Estate Planning and Wills
Statistics indicate that over 60% of Australians lack a valid will, which can lead to uncertainty and disputes upon an individual’s passing. Without a clear directive from a will, the distribution of assets depends on legal standards rather than personal wishes, potentially causing rifts among family members.
Even when a will exists, many do not realise the potential of testamentary trusts, which can provide more flexible and tax-efficient asset management. For instance, income distributed to minor children through a testamentary trust is taxed at adult rates, thus minimising tax liabilities significantly.
Solution: Ensure family members have an updated and legally sound will in place. Engaging in discussions regarding estate planning can safeguard assets and clarify intentions for beneficiaries.
4. Avoiding Difficult Conversations
Discussing wealth and mortality is often uncomfortable, but not addressing these matters can lead to confusion, mismanagement, and lost opportunities. It’s essential to understand the types of assets being inherited, how they will be taxed, and the contents of wills.
Solution: Open lines of communication among family members can help demystify the inheritance process and provide clarity on asset management and distribution.
Conclusion
Inheriting money presents a unique and valuable opportunity for financial advancement, yet it is typically neglected in terms of strategic planning. Recognising the potential pitfalls—such as immediate consumption instead of investment, tax implications, inadequate estate planning, and lack of communication—can help beneficiaries maximise the benefits of their inheritance.
To navigate these challenges effectively, it’s important to approach inheritances with a mindset geared towards investment growth rather than mere lifestyle enhancement. Understanding taxation, formalising appropriate wills, and initiating essential conversations with family members can profoundly influence the lasting impact of inherited wealth. Planning proactively rather than reacting under pressure is key to ensuring that inherited funds contribute meaningfully to long-term financial well-being.
Finance expert Ben Nash, founder of Pivot Wealth, emphasises that discussions about money and death, while challenging, are crucial. For those interested in further financial advice, he encourages contacting Pivot Wealth for assistance tailored to individual financial situations.
