Episode 77 FS360 Podcast - Navigating Inheritances

FS360 Podcast – Episode 77 - Navigating Inheritances

Mulcahy & Co financial planning partner Danny Archer says an individual’s investment options with an inheritance will depend on their “personal and financial circumstances”.

Archer and accounting partner Damian McMahon joined Nicholes Family Law – Our Reality Podcast hosts Nadine Udorovic and Bec Dahl, where they discussed the different ways to navigate inheritances.

“Pretty much most or all standard options such as cash, property and shares - they’re the most common ones that we come across – are available,” Archer said.

“It doesn’t necessarily matter where the money’s come from, but in respect to what options are available to someone that’s received money, it’s basically the same that that person has the option to invest in with their own cash.

“The more relevant questions here that we might ask would be what are that person’s personal and financial circumstances? Also, what are their goals and objectives?

“The answers to those questions are going to determine which investment options that are available are actually most appropriate.”

These options may include:

-      Paying off debt

-      Investing for their children or grandchildren

-      Investing the inheritance with the intent of generating a passive income

While the Australian taxation system does not have an inheritance or state tax, assets could incur tax implications further down the line.

“These inherited assets, if they’re sold, may have capital gains tax apply, or the inherited assets themselves, whether that be a property that generates rent or a share portfolio that has dividends, are likely to have tax implications on this income,” McMahon said.

“There’s sound planning that’s needed to factor in any possible tax implications at the time of transfer and also for the ongoing income that is generated from these assets.”

With inheritances could also come the deceased’s debts, which may affect what is left to the beneficiaries.

“Pending the wishes of the deceased and what’s in their will and estate plan, the most likely and also common outcome is that debt within the state are required to be cleared prior to anything being (given) to beneficiaries,” Archer said.

“It doesn’t always work out like that but most of the time it’s probably the cleanest way because then the net assets are distributed.”

While some people may have experience with possible inheritances like cash and property, other things left to beneficiaries may seem foreign.

This is the time when financial and accounting advice becomes especially important.

“What we can do in the financial services industry is help people break down exactly what it is that they’re inheriting, what kind of asset,” Archer said.

“Let’s assume that someone inherits a basket of assets where they get some cash, some property or some shares as well. A plan there could be to just use that cash part to maybe get rid of some debt that you’re carrying.

“If you do receive an investment property or a share portfolio, it may actually be within your best interests just to keep them where they are … rather than potentially selling something at a bad time … and then you may even incur some capital gains tax as well.”

Following these initial conversations, McMahon and his team’s role would be to ensure the asset is put in the best structure so that if it is moved on in the future, the capital gains tax is minimised as much as possible.

“Also just to plan out and plant the seed in their mind that if we’re going to sell this asset in five years’ time and realise a capital gain, what kind of money do we expect to need to be set aside from a tax perspective?” McMahon said.

“What other options can we do with that money we receive from the sale to possibly reduce tax even more?”