A millennials guide to understanding inheritances

inheritance-guide
Image by Johnny Cohen

There’s no easy way around it; losing a friend or family member is a distressing time in anyone’s life. Aside from the emotional exhaustion that comes with someone passing away, there’s also the duty to take care of their possessions. 

And in some cases, you may also find yourself staring down the barrel of an inheritance. 

According to a 2013 HSBC’s global Future of Retirement report, Australians pass on an average inheritance of $561,636 to recipients. Generally, children inherit the lion’s share, nieces, nephews, or grandchildren inherit 20% of the money, friends receive 4%, and charities may get 2%.

If you’re a millennial and expect to come into some inheritance money, you might be wondering what the best way is to go about managing it. Our guide will walk you through the steps you may want to take and provide suggestions on what not to do.

What happens when I am entitled to an inheritance?

The process for receiving your inheritance will depend on whether the person had a will. In this case, we’ll assume the deceased person did write a will before their death. It is up to the executor of the will to handle the distribution of assets and other estates, which can only be done once a Grant of Probate is obtained from the Supreme Court. 

A Grant of Probate is an order that proves the will is the most recent will of the deceased, granting the executor power to begin collecting and distributing the estate in accordance. A death certificate will also need to be obtained before this can occur. 

From there, the executor will need to make sure all debts, taxes, or funeral expenses are first taken care of before they can start releasing the funds. Once this is resolved, the executor will contact the will’s beneficiaries.

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What should I do with my inheritance?

Ultimately, it is up to you to use your inheritance as you see fit, but some financially positive ways you might want to use it include:

  • Paying off any debt you have - If you have any personal debt, like from a credit card or personal loan, this may be an excellent opportunity to clear your debt for good. 
  • Putting it into your super - Retirement might seem like a long way away, but you can’t go wrong with investing in your future self. Putting the money into your super can also keep you from blowing your inheritance on extravagant purchases. Just keep in mind that there may be a limit on the amount you can contribute. 
  • Stash it for a home deposit - If one of your long-term financial goals is to purchase your own home, it might be a good idea to put the cash toward a home loan deposit.
  • Invest in shares - As property prices continue to skyrocket, many younger Aussies have now started to look toward investing in the stock market. However, as there is some risk with investing this way, you may want to seek professional advice from an expert, like a financial advisor or broker.
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What should I not do with my inheritance?

One of the sillier things you can do with your inheritance is letting your spending get out of control. It’s important to remember that you have just lost a loved one, so emotions are high and rational thinking may be low. 

Of course, there’s nothing wrong with treating yourself or indulging in some self-care, like purchasing a new car or taking an extended holiday, but failing to establish a financial plan or budget could see you overspend and blow a big chunk of your inheritance. 

The idea of receiving a large sum of money may also lead you to believe that you can now quit your job. However, unless you’ve inherited millions, there’s a good chance you’re still going to need to be employed. Being realistic like this will also keep you from spending every last dollar of your inheritance.

Will my inheritance be taxed?

No, it won’t be. 

In 1979, the Queensland government abolished any tax obligations on inheritance, shortly followed by other Australian states. This means you will not pay tax if you inherit cash, shares, property, or gifts unless the executor advises you. 

If you inherit property, you might have heard of something called Capital Gains Tax (CGT). This is a tax paid when you sell a capital asset, like property, and make a capital gain. Although it is separately acknowledged as CGT, it is a part of your regular income tax. 

In the case of inheriting a property, CGT generally doesn’t apply, but it will depend on factors, like:

  • when the deceased acquired the property 
  • when they passed away 
  • if you sell the property within two years of the person’s death 
  • whether the property was used to produce an income (like rent) 
  • whether the deceased was an Australian citizen at the time of their death.

You can figure out whether you may be fully or partially exempt from CGT by working through a series of questions on the ATO website

And if you’d like to learn more about other money mysteries, like understanding private health insurance or consolidating your super, head on over to our Family Finances hub.