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Managing the largest movement of wealth in our history

Written and accurate as at: Aug 30, 2021 Current Stats & Facts

More than 3.5 trillion dollars in inherited funds are expected to change hands within Australia during the next 20 years, with Australians enjoying one of the highest inheritance payout rates anywhere in the world.

According to an April 2021 report prepared by Philanthropy Australia, the Paul Ramsay Foundation and Perpetual support. The bulk of the upcoming wealth transfer between 2021 and 2040 will occur in Australia’s largest population centres on the East Coast, predominantly in New South Wales and Victoria (see figure below).

Philanthropy Australia report suggests much of this wealth transfer will be concentrated among the elderly. Within the 2021-2040 period, 38 per cent of the wealth transfer is expected to be from the 85 years+ groups.  Given a longer life expectancy, women are expected to account for 54 per cent of the household wealth transferred from households aged 85+ years. The cohort passing their wealth on at the peak of this wealth transfer is now in their late 60s and 70s and are likely retired or entering retirement.

According to investment bank HSBC’s Future of Retirement report, Australians pass on average $561,000 divided among their heirs, almost four times the global average of $148,000, with two in every three Australians planning to leave an inheritance.

McCrindle (2016) estimates that Australia’s over 60’s will transfer $3.5 trillion in wealth, growing at 7% per year (see table below). With an estimated 7.5 million children, if 70% of wealth is transferred then it is estimated approximately $320,000 on average will be passed on to each child.

This payout rate is significantly higher than has been the case for previous generations, with higher property prices and ever-increasing retirement savings creating larger and larger estates to be handed from one generation to the next.

Unlike most OECD countries, strictly speaking, there are no inheritance taxes in Australia, so this has also encouraged Australians to hold on to their estates until they pass, rather than distributing assets to the next generation while they’re alive.

The only exception is superannuation.

If, for example, a person inherits funds from a loved one’s superannuation account and they are not dependent, the transfer will trigger a 15 per cent death benefit tax, plus Medicare levy.

This can be reduced if the person leaving the funds withdraws the money and places those savings outside superannuation as part of their general estate before they pass. But given most people don’t know exactly when they will die, this is a rare event.

Another method of avoiding this death benefit tax is to establish a family trust.

However, establishing a family trust can be a complex and expensive option and requires sophisticated legal and tax advice before being implemented. But, as a strategy, it can successfully reduce your tax obligations.

Any asset can be inherited - from property to jewellery, from shares in listed companies to fine art. Even animals can be included in your Will. If you can own it, then it can be passed on to a beneficiary when you die.

Further to considering the legal structure or entity and taxation implications, it is vital to establish inclusive dialogue, either informal or formal, within the family unit.  To support a seamless transfer, an open conversation may include identifying assets, understanding individual and/or collective objectives, highlighting any knowledge gaps, determining timing, etc.  Some more successful wealth transfers established a family charter outlining their agreed objectives and measures or processes to adopt should a change in circumstances or events occur, including a breakdown in communication or change in objectives.

Receiving an inheritance can be more complex, and families should consider professional advice regarding managing best and investing any funds received.

Regarding any Centrelink entitlements, inherited funds are included for the asset test. Therefore, they are subject to the normal deeming regulations and will impact pension entitlements accordingly.

For most people, the biggest challenge is to find a way to squeeze these funds into superannuation, where they can be invested within a tax benign environment. And once they are used to support an account-based pension, they will effectively become tax-free in terms of any capital gains or income.

This is where you need to seek professional advice.

The rules governing just when and how much can be contributed to super will vary depending on your age, whether you are still working or not, and how much you already have in super.

As estates become larger, it is increasingly important to get good advice to ensure your assets are distributed according to your wishes. The simpler and more straightforward your Will, the more likely it is to be successfully implemented.

In addition, most advisers encourage clients to put in place a living Will, where, either in writing or via a conversation with your beneficiaries, you outline precisely what your wishes are and the reasons behind them.

By doing this, you are likely to discourage any challenges to your Will - challenges that can be extremely costly. Moreover, given that challenges can be financed by funds held within the estate, the prospect of challenges can in themselves sharply decrease the remaining assets to be distributed.

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