What You Need to Know About Inheritances in Australia
When a loved one dies, the process of grieving is often accompanied by the complex task of dealing with the estate. Learning about inheritances in Australia can help you understand what to expect if you receive assets or help ensure your own estate is handled as intended.
This guide covers critical aspects of inheritance in Australia from a legal, financial, and personal perspective.
Read on for advice regarding tax obligations, the role of wills, collecting superannuation death benefits, and more.
What is an Inheritance?
Inheritance refers to the assets a person leaves behind when they die, which are distributed to beneficiaries named in their will. Typical inheritance assets include:
- Property – Houses, land or commercial real estate
- Cash and investments – Savings, shares or bonds
- Personal belongings – Jewellery, art, antique furniture
- Superannuation death benefits
The total value of these assets forms the deceased person’s estate. This gets distributed through a legal process called probate. However, it’s important to remember that not every estate will go through the probate process.
Is Inheritance Taxable in Australia?
Unlike many countries, inheritances in Australia do not attract inheritance tax or estate duties at a federal level. These taxes were abolished between 1979-1982.
Beneficiaries don’t have to pay tax on the value of inherited assets. However, they may face tax obligations depending on the asset and income it generates. Common scenarios include:
- Paying income tax on rental earnings from an inherited investment property
- Paying capital gains tax if selling inherited property (with some exceptions)
- Paying personal income tax rates on inherited super or investments
There are also special rules for beneficiaries living overseas. Seek advice to ensure you meet any Australian tax obligations.
The Role of Wills in Inheritance
To distribute an estate as intended, most people prepare a will spelling out beneficiaries and shares. Key things to know about Wills include:
- Without a will, assets get divided according to state intestacy laws – often not as the deceased wished
- Even with a basic will, you can specify exactly how your estate gets allocated
- More complex wills can establish testamentary trusts with asset protection and tax minimisation benefits
Reviewing your Estate Plan regularly and keeping it updated ensures it remains fit for purpose as life circumstances change. This gives you greater control over your family’s inheritance and achieving the outcomes you desire.
Collecting an Inheritance in Australia
Generally, receiving an inheritance involves working through the following steps:
- Obtain death certificate
The executor of the will uses this to start estate administration by proving death. - Collect will certificate and relevant paperwork
This outlines distribution wishes and identifies assets/liabilities involved so the executor can undertake estate planning. - Review will copy
Beneficiaries should receive an authorised copy of the will outlining distribution details. - Complete asset/liability inventory
The executor must finalise exact assets and debts to determine the value of the estate for probate and distribution calculations. - Process liquidation and distribution
Once probate confirms the will’s legality, assets get officially valued and liquidated if required, with proceeds transferred to beneficiaries. Please note that probate is not always required, particularly for smaller estates.
Throughout this process, beneficiaries must ensure the executor acts properly in securing and distributing the estate.
What is included in an Inheritance
When considering the scope of an inheritance in Australia, it’s essential to understand the variety of assets that may be included. An inheritance isn’t just about cash and personal belongings; it encompasses a range of assets, each with its own legal and financial implications.
Individual Assets
Generally, only assets that you own individually will form part of your Estate. A common misconception is that all assets (sole name, jointly owned or company/trust assets) will form part of your Will, however only solely owned assets will.
Jointly Held Assets
One of the most common scenarios involves assets held in joint names, such as real estate, bank accounts, or shares. In cases where these assets are held as ‘joint tenants’, the right of survivorship applies. This means that upon the death of one owner, their share automatically passes to the surviving joint owner(s), outside of the estate. Therefore, these assets do not form part of the inheritance distributed through a Will, unless they become solely owned by the last surviving joint owner.
Superannuation
Superannuation is a unique component in Australian inheritances. It’s crucial to note that superannuation does not automatically become part of an individual’s estate. The distribution of superannuation benefits after death hinges on whether a valid Binding Death Benefit Nomination (BDBN) exists. This nomination directs the superannuation fund on how to distribute the benefits, potentially to different beneficiaries than those named in the Will. Without a BDBN, the superannuation fund’s trustee will decide the distribution, considering factors like the deceased’s Will, surviving dependents, and any non-binding nominations.
Life Insurance Policies
The proceeds from life insurance policies are typically paid directly to the named beneficiary in the policy, which might differ from the beneficiaries in the Will. To align the distribution of these proceeds with the wishes expressed in the Will, the policy should nominate the legal personal representative as the beneficiary.
Trust and Company Assets
Assets held in a trust or owned by a company present another layer of complexity. Trust assets are controlled by the terms of the Trust Deed and are not personally owned by the individual, thus not forming part of the personal estate. Similarly, assets owned by a company are separate from personal assets. However, shares owned by an individual in a company are considered part of their estate and can be bequeathed through a Will.
Understanding the composition of an inheritance is vital for both estate planning and for beneficiaries. It ensures that all parties have a clear picture of what assets are included in the estate and which are dealt with outside the Will. This knowledge is crucial for effective management and distribution of an inheritance, aligning with the deceased’s wishes and legal requirements.
What About Super?
Superannuation funds have special rules regarding inheriting account balances when a member dies.
It’s important to know that Super does not form part of an estate automatically and this will depend on the beneficiaries.
Superannuation funds have special rules regarding tax obligations when inheriting account balances.
The tax treatment of a super death benefit depends on multiple technical factors. These include:
- Whether the beneficiary meets the definition of a “tax dependent” under superannuation law
- What proportion of the deceased member’s account balance was made up of taxable components
In some situations, strategies may be available to minimise the tax payable on a death benefit. However, the regulations are highly complex, with the final tax impact relying on the specific circumstances.
Making the Most of an Inheritance
Coming into unexpected funds through an inheritance presents opportunities if handled wisely:
- Pay down debt – Eliminate credit cards or personal loans to improve cash flow
- Invest – Boost returns through vehicles like shares, property or managed funds
- Save – Set aside a portion for goals like holidays, education costs, retirement or lifesty;e assets, such as a house. Of course, any big savings or purchases should be made with a balanced eye on the future.
- Structure – Proper tax structuring of inheritance is crucial, including consideration of options such as super, trusts, and alternatives. Seeking advice is recommended.
However, it’s important to balance using inheritance as a foundation for future security without recklessly squandering it.
When you are expecting an inheritance, it is important to plan ahead and determine your priorities. To ensure that your goals are realistic and attainable, seeking guidance from a financial advisor can be immensely helpful. They can provide valuable insights and assist you in navigating through the complexities of managing an inheritance.
Seeking professional financial advice can help protect assets while optimising them to support your needs.
Key Takeaways
Inheriting assets introduces complex logistical, administrative, emotional and financial considerations requiring careful navigation. Seeking professional guidance minimizes potential pitfalls and ensures you secure the full value of the inheritance to optimal use supporting your needs.
Most importantly, remember your loved one bequeathed you these assets for a reason. Managing the situation respectfully aligns with their wishes and sustains their legacy.
It also serves as a reminder to document your own estate plan outlining inheritance wishes for beneficiaries. Establishing a crystal clear will and keeping it updated provides control and continuity for your legacy.
If you need any assistance getting your estate plan in order or would like to discuss how Wealth Architects can support your financial future, contact our team today. Our financial planners bring empathy, clarity and expertise guiding you through complex inheritance matters and beyond.
Disclaimer: This article provides general information only and does not take into account your personal financial situation, objectives or needs. Before making any financial decisions relating to inheriting an estate, superannuation or investments, you should obtain professional legal, tax and financial planning advice tailored to your specific circumstances. Managing an inheritance can have significant tax, legal and financial implications so it is important to seek guidance from qualified professionals to ensure the best outcomes based on your situation.
