The great Aussie wealth transfer is just around the corner – but along with it comes some hidden costs.
As our Baby Boomers age, we are on the verge of one of the largest intergenerational wealth transfers in history. Over the coming decades, trillions of dollars in property, superannuation, investments and family assets are expected to change hands.
Australians aged 60 and over are projected to pass on $3.5 trillion (approximately $175 billion), every year over the next 20 years. For younger generations, this upcoming inheritance is a cornerstone of their long-term financial planning. 21% of working-age Australians expect to rely on this upcoming inheritance to fund their retirement.
What many of us may, however, not know is that these inheritances can come with complexities and hidden costs that many Australians overlook, or are simply unaware of.
As always, planning head is always important.
The hidden costs of an inheritance
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Unexpected Tax Consequences
Many beneficiaries assume inheritances are tax-free. While Australia doesn’t have a formal inheritance tax, capital gains tax (CGT), and superannuation death benefit tax can significantly reduce the value of what you receive. It’s important to be aware of these hidden costs that may arise, as often the tax bill arrives some time after the income distribution and catches some off guard.
Superannuation death benefits: Tax-free for spouses and dependent children, but adult children may face tax of up to 15% plus Medicare levy on the taxable component.
Inherited property and shares: You may inherit the original cost base, not the value on the date of death, meaning if/when you sell an investment property, you may be liable for Capital Gains Tax.
Trusts and estate structures: If assets generate income before distribution, tax may apply at the estate level.
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Efficient Distribution
Even when a will exists, the process of distributing an estate can be slow, expensive, and emotionally fraught, which can result in some hidden costs along the way including probate delays, legal and executor fees and property sales expenses. Added to this can be family issues, including disagreements between beneficiaries, outdated or contested wills.
With property and super making up more than three-quarters of household wealth, these delays can lock up large asset values for long periods.
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Centrelink Impacts
On the flipside, an inheritance can increase your wealth, but it can also decrease your government support. Under Centrelink rules, a lump-sum inheritance may affect your age pension payments, JobSeeker, disability support pension and rent assistance.
It can push you over income or assets test thresholds, which can lead to a reduction or loss of payments. Failing to notify Centrelink promptly can result in overpayment debts and penalties, adding yet another layer of financial stress.
A Sensitive Topic, but an important conversation
In Australia, inheritance planning is rarely discussed openly within families. It can feel awkward and uncomfortable, and not exactly the conversation to bring up at the next family BBQ. But avoiding them can lead to even worse feelings and consequences.
Our biggest piece of advice is to seek professional advice early to discuss estate planning. As licensed financial advisors and estate planners, we can assist you to structure your estate efficiently for minimised tax obligations for your beneficiaries, prepare or update your will, set up binding superannuation nominations, help you to understand any future Centrelink ramifications and prepare for a smooth transition of your wealth to your future generations.
Get in touch with the team to make a booking to discuss your future estate planning.
