The 4 Essentials When Receiving an Early Inheritance
With an awareness of the challenges of high house prices and resultant large mortgages, intergenerational wealth transfers, in the form of early inheritances, are happening more and more. So if you find yourself in the fortunate position of receiving an early inheritance, what are the smart moves to put you and your family on the path to financial security? And how do you appropriately honour and respect the hard work that went into the generation of this wealth?
I’ve got 4 suggestions. Let’s dive in and take a look.
1. Determine your goals
Frequently people who receive an early inheritance haven’t had much reason or opportunity to take a step back from the day-to-day and think about their long-term life goals. Paying off a mortgage and raising the family have probably taken up all the available headspace.
So the first thing we dig into when working with clients who’ve received an early inheritance is to discuss long term goals and their prioritisation. Is the current home the forever home? Is there something you’ve always hoped you could achieve, but never found a way to make it possible, for instance perhaps a holiday house near the water? How much did you want to support your kids as they transition into the adult world? When did you want to retire? Is shifting from full time to part time something that you’d like to be able to do at some point.
These are the sorts of goals that I see most commonly.
All financial planning requires that clarity on your goals is the starting point, but whereas most people looking to discuss their retirement have at least given some thought to when that will be and perhaps what retirement would look like, frequently those receiving in early inheritance haven’t done that reflection. It’s for that reason, that this is number one in your 4 essentials when receiving an early inheritance.
2. Clear debt
Paying off the mortgage is the most common thing I see happen upon receipt of an early inheritance. Indeed frequently, the reason cited for providing the early inheritance gift in the first place was to help clear the mortgage. Owning your home outright is something we’d all like. It removes a significant level of stress, and also greatly reduces your cash flow needs, with mortgage repayments having evaporated. The consequent lower living costs gives you more options and flexibility in life.
Paying off debt has the attraction of generating a guaranteed return, that being the interest expense you would have otherwise incurred had you retained the loan. Of course if you wish, you could always re-borrow for investment purposes, (in which case the debt would be tax deductible), but it’s hard to go wrong with paying off your home.
3. Invest
With the mortgage cleared, next cab off the rank is investment. Perhaps that’s within superannuation, or maybe outside, it depends on your particular goals. For instance if you have an early retirement objective, you would want to have some money outside super so you have access prior to age 60. If that is not a goal, then perhaps using the superannuation system for the tax effectiveness that it provides might be your focus.
The appropriate strategy will be dictated by your goals, but the important thing is to ensure this early inheritance gift is put to work. Past generations in your family have worked hard to accumulate this wealth, and it would be disrespectful to then have it sitting in a bank account being eroded by inflation.
4. Help the next generation
The 4th and final consideration when managing your early inheritance, is to think about how this might flow through to future generations. Australia is somewhat unusual in having no gifting or estate taxes, and so it is possible for financial security and wealth to compound across generations.
In some cases we have clients use some or all of an early inheritance to fund private school fees, or pay university fees so that their children don’t graduate with an enormous debt. Education is an investment with a high rate of return.
If you’ve received this early inheritance at a phase in life where you are actually quite financially comfortable, perhaps you pass this gift through to the next generation immediately, either helping them get into the property market, or paying down their mortgage. I have seen examples where family might park money in an offset account for their kids. Their children continue with their normal mortgage repayments, the money in the offset meaning far more of each repayment comes off the principal instead of going out in interest. In this way access to the funds is retained for later in life should they ever be required, and there are no tax consequences.
Early inheritances are a great idea for those who can afford to grant them. With lifespans increasingly going into the 90s, inheritances upon death frequently don’t flow through to the next generation until it’s too late to have a meaningful impact. With good financial planning to ensure long term financial security is locked in, an early inheritance can have a significant impact on the life of younger generations, and if well managed, that wealth can compound long into the future.
If you’ve received an inheritance and you need advice on what to do next, that’s exactly what we do at Guidance Financial Services. Learn more about how we can help you make the best choice for you when it comes to your inheritance below.
