These are the most important things to consider when planning an early inheritance.
Many people nearing or in retirement start to think about how they can provide for their adult children in the future. For some, the idea of giving an early inheritance – while you’re still alive and able to witness the benefit – is particularly appealing. But while this can be a meaningful gift, it’s important to understand the financial implications, especially when it comes to tax and financial planning.
Here are some key considerations before passing on that early inheritance.
1. Tax Implications
One of the first things to understand is how different types of gifts or inheritances are treated from a tax perspective in Australia. Generally, Australia doesn’t have an inheritance tax, meaning your adult children won’t be taxed just for receiving money or assets from you. However, there are some tax implications to be aware of:
- Capital Gains Tax (CGT): If you’re passing on assets like property or shares, your beneficiaries may be liable for capital gains tax when they sell those assets. The CGT will apply to any increase in value from when you bought the asset to when it’s sold. It’s worth speaking to a tax professional about how this might impact the inheritance and how to structure it to reduce tax obligations.
- Gifting Large Amounts of Money: There’s no tax on cash gifts in Australia, but if you’re receiving a pension or other government benefits, large gifts may affect your entitlements. Centrelink considers significant gifts when assessing your assets, which could reduce your pension payments. The limit is currently $10,000 per financial year, or $30,000 over five years, without impacting your entitlements.
2. Superannuation Considerations
Many retirees look to their superannuation fund to provide early inheritance to their children. It’s essential to understand how tax can impact these funds:
- Death Benefits Tax: If you leave superannuation funds to non-dependent adult children, they could be liable for a death benefits tax of up to 17%. This is something to discuss with your financial planner or superannuation provider to see if there are more tax-effective ways to structure the inheritance, such as transferring super into other assets.
- Accessing Your Super: If you’re planning to gift money from your super while still alive, ensure you’ve reached the preservation age and are eligible to withdraw without penalties. If you’re accessing your super before retirement, you may face withdrawal fees or other consequences.
3. Impact on Your Financial Future
While giving an early inheritance can be a generous gesture, it’s crucial to ensure you’re not compromising your own financial security. Retirement can be unpredictable, and medical or living expenses may rise unexpectedly. You don’t want to be left short by gifting too much too soon. Always keep a healthy financial buffer and consider seeking advice from a financial planner to ensure you’re balancing generosity with long-term financial stability.
4. The Gift of Education
Sometimes the best inheritance isn’t just a lump sum but an investment in your children’s financial education. Helping them understand how to manage, invest, or grow the money you’re giving them can be the greatest legacy you leave. You could provide access to a financial adviser or even invest in financial wellness programs that empower them to make smarter financial decisions.
5. Document Your Intentions
Leaving an early inheritance can sometimes lead to family tension if expectations aren’t managed. It’s important to communicate clearly with your children about your intentions and ensure that all gifts are documented. If you plan to leave more in the future, make sure your will reflects that balance.
Leaving an early inheritance can be incredibly rewarding, but it’s important to approach it thoughtfully. By understanding the tax implications and ensuring your own financial stability, you can pass on the gift of security to your adult children while giving them the best chance to thrive financially.
As the cost-of-living crisis continues to strain many Australians, learn these 5 Essential Tips to Help Australians Manage their Personal Finances. And as you enter your silver years, here is How to Avoid the Biggest Money Regrets in Your 50s.
