We are at the very beginning of the largest intergenerational wealth transfer in history, as generally wealthy baby boomers pass away and the next generation inherits their assets. It’s estimated that by 2050, $3.5 trillion in assets will have changed hands within Australia – and it’s highly likely you are unprepared for it.
Whether you’re the baby boomer who will leave the inheritance or the Gen X or Gen Y on the receiving end, there are some things you need to know that will help you prepare for what’s to come.
The addition of some level of inheritance is often the difference between having the financial resources to really retire life ready and living a more modest retirement than they were hoping for. The size of inheritances is increasing also. With average home values sitting around $1 million or more, even just inheriting a house (perhaps even split with siblings) is a lot of money.
If you could be on the receiving end of that, be well prepared to deal with it and also have given some thought to what you might do with it.
Talk about it
Both generations need to be having conversations about the wealth transfer, and the earlier the better.
Open conversations about what you’ve got, what your assets are, where they are, how to access them and where your financial records are stored can reduce misunderstandings, ensure everyone’s wishes are clearly communicated and make the whole process a lot smoother.
Remember, it’s going to be an incredibly emotional time dealing with the death of a loved one. Having conversations about all of this while all parties are still alive and without the emotion will make things easier for everyone.
Get a will
It’s estimated that 60 per cent of adult Australians have a will. The number increases with age, with 88 per cent of people over 65 with a will and 93 per cent of people over the age of 70 with a will.
With numbers that high for the over 65s, there must be a whole lot of 30 and 40 somethings who don’t have one. It also means that 64 per cent of Australians with children under the age of 18 don’t have a will.
Dying without a will is called dying intestate, and each of the states and territories in Australia have different laws that determine who gets your assets and how much they get. So, if you don’t want your state government deciding where your money goes, get a will.
Power of attorney
A power of attorney is a legal document that lets someone else make decisions on your behalf. It allows the attorney to conduct financial, legal or personal affairs for you.
If you have older parents, it’s incredibly important you ensure they have granted a power of attorney to someone, ideally someone younger than them (perhaps you). It’s very common for partners to grant power of attorney to each other, but if they are both older, you can find yourself in a situation where the attorney doesn’t really have the capacity to make decisions themselves.
For yourself as well, it can be convenient for someone to act on your behalf if you are unable to: perhaps you’re away for work or, worse, some accident leaves you incapable of making decisions for yourself. Without a power of attorney document, your family will need to apply to the courts to be granted the power.
Tax on inheritance
We don’t have an inheritance tax in Australia, like those that exist in some other countries. But that’s not to say there won’t possibly be some tax consequences for you, depending on what you inherit and what you do with that inheritance.
- Inheriting cash: Cash is inherited entirely tax free. Cash isn’t subject to capital gains tax, so you don’t have any of those complications. If you start to earn interest on the cash or choose to invest it, any earnings will then be subject to tax.
- Inheriting a primary residence: With any type of property you may inherit, it’s important you have details and records of how that property was used. If a property was used as an investment or holiday home before becoming someone’s primary residence, for example, there will be different tax consequences than if the home was just used as a primary residence the whole time it was owned by the deceased. If that property was only ever used as the deceased’s primary residence, you are granted a two-year window from the date of death to dispose of the property without incurring any capital gains tax liability.
- Inheriting superannuation: Superannuation benefits are made up of two components: the taxable component and the tax-free component. What makes up each component is determined by how the money got into the superannuation fund in the first place, and the types of contributions made into your superannuation fund. If superannuation is inherited by a spouse (including de facto partner), former spouse, child under 18 or person in an interdependency relationship, they will inherit the full balance tax free. There’s one big group of superannuation beneficiaries who don’t make the list – your children over the age of 18. If superannuation is inherited by anyone who isn’t on that list, it’s likely they will have to pay tax.
- Inheriting shares or investment property: Inheriting either shares or an investment property doesn’t trigger any tax; however, if you sell what you’ve inherited, you may need to pay capital gains tax. If you don’t sell the inherited asset, eventually, the asset will then be inherited by someone else and the capital gains tax ‘problem’ becomes theirs.
Edited extract from Retire life ready: Practical steps to build your wealth and live your ideal retirement by James Wrigley (Wiley, $34.95), available 29 October at all leading retailers.
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