The inheritance wave is building but most people are unprepared for the ride
Transfers of accumulated wealth from one generation to the next are part and parcel of everyday life.
But the next 20 to 30 years will see the biggest intergenerational wealth handover in history.
According to estimates made by the Productivity Commission in a 2021 report, around $3.5 trillion of assets is likely to be transferred in Australia by 2050.
The largest part of this great wealth transfer will be between members of the “Baby Boomer” generation (people born just after the end of World War II through to 1964) and their children and other heirs.
It will include family homes, investment properties, superannuation money, direct shares and a wide range of other financial and non-financial assets.
The value of inheritances is not only likely to grow dramatically as wealth levels increase but it will be an increasingly important source of income and assets for younger generations.
Great expectations
Research found that around one in two Australians have received or expect to inherit money or property, either from their parents or others.
The conversation around inheritances interweaves with Australian government research that many Australians are not exhausting their superannuation savings before they die.
The 2023 Intergenerational Report found that most retirees draw down at the legislated minimum drawdown rates.
“This results in many retirees leaving a significant proportion of their balance unspent, for example, a single retiree drawing down at the minimum rates would be expected to still have a quarter of their retirement assets at death,” the report noted.
Additionally, the 2020 Retirement Income Review included projections from Treasury that outstanding superannuation death benefits could increase from around $17 billion in 2019 to just under $130 billion in 2059, assuming there’s no change in how retirees draw down their superannuation balances.
A touchy subject
Inheritance planning, unlike succession planning within a business, is an area that’s rarely discussed at the family level.
Most families regard subjects such as death and the future division of wealth as unpleasant, and potentially sensitive when multiple heirs are involved.
But there’s a lot to be said for having open discussions within your family about the intended treatment of assets and future inheritances.
Creating a valid will, and specifically documenting how you want your assets to be managed and divided after your death, should be a key step in the inheritance planning process.
Residential real estate and superannuation, which combined make up more than three quarters of total household assets, are the largest components of most inheritances.
Ensuring that any superannuation you have left over at the time of your death is distributed according to your wishes requires you to complete a binding death benefit nomination provided by your super fund.
Seek professional advice
It’s important to be aware of any potential tax implications. For example, while superannuation distributed to a surviving spouse or dependent children is generally tax free, non-dependents (including adult children) may be required to pay tax on amounts they receive.
That comes down to how much of your super is made up from pre-tax and after-tax contributions.
Capital gains tax does not apply if someone inherits direct shares or other financial securities, but tax may apply if they later dispose of them.
Any unapplied capital losses that could be used to offset capital gains tax cannot be transferred to beneficiaries.
CoreData research published recently has found that more than half of inheritors do not have an ongoing advice relationship to manage their incoming wealth.
“There is significant opportunity for advisers to connect with a younger cohort of inheritors. It’s a win-win situation: those who can support a smooth and meaningful wealth transition will not only build strong client relationships but also help shape lasting financial legacies,” CoreData found.
Estate planning can be complex. Consulting with us can help you and your intended beneficiaries map out an inheritance framework that also identifies issues such as potential tax liabilities is a prudent step.
Source: Vanguard
This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™
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