posted in: Investment Advice
Windfall Inheritance : What to Do When You Suddenly Receive a Large Sum of Money
We know that receiving a windfall inheritance in Australia can be equally life-changing and slightly stressful.
Whether you’ve inherited a large sum of money, a sizeable property portfolio, or a similar other asset, it’s crucial to understand what to do in the aftermath of receiving a windfall inheritance and the implications an unexpected financial gift can have.
As a financial advisor in Sydney, Montara Wealth has created this guide to help you understand windfall inheritances.
We’ll explore exactly what windfall inheritance is, the common types of windfall inheritance, steps to take after receiving a windfall inheritance, how to financially plan an inheritance, and how to avoid common mistakes concerning windfall inheritance.
If you have recently received an inheritance, or want to be prepared for the future just in case, keep reading to learn how to make the most out of a windfall inheritance in Australia.
Understanding Windfall Inheritance
So what is a windfall inheritance?
This refers to any large or unexpected sum of money, property, or other assets that isn’t a result of your day-to-day work and is usually received from a deceased person’s estate.
While almost always exciting, a financial windfall can be potentially overwhelming and requires a high degree of careful planning to ensure you make the most of this financial opportunity.
Understanding windfall inheritance is certainly important, especially in Australia, with a recent study revealing that about 2 in 5 Australian adults expect to receive an inheritance in the future (that’s around 8.8 million Australians!).
Common Types of Windfall Inheritance
We have listed the four most common types of windfall inheritance in Australia below :
1. Lump Sum of Cash :
Most common is a direct sum of money from savings, accounts, or other liquid assets.
2. Real Estate/Property Asset :
Another common form of windfall inheritance is inheriting property assets such as a family home. This comes with responsibilities such as property management and other tax considerations.
3. Financial Investments :
Sometimes, a windfall inheritance can be a boost to a diversified financial portfolio of shares, bonds, ETFs, or superannuation.
4. Personal Belongings :
In other circumstances, a windfall inheritance can be the acquisition of a treasured heirloom, sentimental items, or a prized collection.
Emotional Impact of Receiving a Sudden Inheritance
Receiving a windfall inheritance can be an incredibly overwhelming experience, and it is crucial to acknowledge the emotional weight such a situation can bring with it.
This acknowledgement is crucial, as it is easy to make rash, emotionally-driven decisions when it comes to unexpectedly inheriting a large sum of money.
Some of the most common emotions we observe when it comes to a windfall inheritance include :
1. Shock and Disbelief :
It can be incredibly overwhelming to receive an inheritance, especially if it was unexpected.
It is common to be in shock and also a little afraid of the sudden responsibility a big inheritance entails.
2. Grief and Loss :
In most cases, windfall inheritance is tied to the loss of a loved one or another significant figure in a person’s life.
While it may be exciting, an inheritance is often bittersweet and is a reminder that a certain person is no longer with you.
This emotional weight often influences how you initially feel regarding the inheritance itself.
3. Guilt :
A windfall inheritance can bring about feelings of guilt for certain people.
Some people may feel unworthy, worried that they won’t honour the wishes of the deceased, and ashamed if they received more than other parties.
4. Relief :
If you are someone who has been struggling financially, or has so in the past, the safety net of a windfall inheritance can bring a sense of relief.
There is a new level of security, but this can also make individuals stressed, especially if they have been unable to make wise financial decisions in the past.
5. Confusion :
A windfall inheritance, while inherently positive most of the time, can leave people stressed and confused as to what they should do with the money.
Should they invest the money, pay off debts, or start a business?
Often, people become overwhelmed regarding how to best approach their newfound wealth.
6. Fear of Relationships Changing :
A sizeable inheritance can shift family relationships, especially if there is disagreement or bitterness regarding the distribution of the inheritance.
Whether it’s feelings of jealousy, bitterness or resentment, all can influence the emotional experience of receiving a windfall inheritance.
It is always important to take your time to process your feelings and acknowledge the emotional impact of an inheritance.
If you are struggling to understand or deal with your emotions, it can be a good idea to consult a therapist to help you make sound decisions without being overwhelmed by your emotions.
By addressing the emotional complexities early on, you can progress forward with a level head and a clearer mindset, ensuring the inheritance has a positive impact on your life.
What Are the Steps to Take After Receiving a Windfall Inheritance?
At Montara Wealth, we know that an inheritance can be both exciting and overwhelming, which can lead to people making rash decisions.
These are the five most important things to do in the aftermath of a windfall inheritance so you can avoid squandering your wealth.
1. Do Not Make Decisions On A Whim :
Always take your time in the days/weeks/even months after receiving an inheritance.
You aren’t on the clock; you don’t have to spend it all at once. Time is on your side here.
Weigh up all of your options, and consider all affected parties in your decisions. This is where financial advice from a professional can make all the difference.
2. Look At Your Current Debts :
If your windfall inheritance is in the form of a lump sum of money, then consider paying off any high-interest debts you currently have.
This could be a home loan, credit card debt, or student loans. A windfall inheritance gives you the chance to clear your debts and start fresh.
3. Seek Out Financial Advice :
Getting sound and experienced legal advice in the aftermath of receiving an inheritance is strongly recommended.
Tax implications can be confusing, and getting your head around what you do and don’t owe based on your inheritance is essential.
A financial advisor can also help you create both short-term and long-term financial strategies.
4. Diversify Investments :
You should consider building your wealth and using your inheritance to use a variety of different investment strategies.
Whether that be property, stocks or a managed fund. You can plan such financial strategies with a financial advisor or planner.
5. Superannuation Contributions :
An attractive option, depending on your age and goals, may be to take advantage of your superannuation.
It is a strategic move in Australia, especially when it comes to tax.
Whether you want to grow your retirement savings, reduce your taxable income, or make the most of your inheritance, superannuation contributions can be your best friend.
Receiving a windfall inheritance is definitely a monumental event for many people and can often be life-changing. How you handle such a monumental event makes a big difference.
Financial Planning Tips for Managing a Windfall Inheritance
Let’s talk now about Montara Wealth’s financial planning tips and get you on the right path moving forward when it comes to approaching your windfall inheritance with the right strategy in mind.
Tax Implications of Windfall Inheritance
In Australia, there are no taxes on an inheritance, as stated by the Australian Taxation Office (ATO).
What does this mean?
Well, it means that if you inherit a lump sum of cash, property, shares, or other assets, it does not trigger a tax bill simply because you received them.
Do you ever have to pay tax relating to a windfall inheritance?
Yes, but it’s more indirect.
You will have to pay tax on inheritance under the following circumstances.
1. Super Death Benefits :
As part of the windfall inheritance, if you inherit superannuation savings, and you are a non-dependent, you might face tax on the taxable component of the super benefit.
2. Additional Income :
Say you inherit a rental property and begin generating income from the property; that income would be taxable just as any other general income.
3. Capital Gains Tax (CGT) :
As part of your inheritance, if you acquire property, shares, or other capital assets, and then later on sell them, then you may have to pay CGT on the gain, based on whatever the original cost base was.
4. A Non-Tax Resident of Australia :
If you are a non-tax resident of Australia and receive an Australian resident inherited asset, then you will have to pay CGT on the transfer of the assets.
It is always a good idea to work with an experienced financial advisor to ensure that you do not miss anything or pay for something that you don’t have to.
Avoiding Common Mistakes with Windfall Inheritance
As previously mentioned, an inheritance is a big deal, and how people react and deal with their newly acquired wealth has a big impact on their future financial outlook.
A study conducted by Perpetual found that on average Australians used their inheritance, 30% of the time to invest, 28% of the time to pay off a mortgage, and 19% shared the wealth with their family.
Other uses commonly observed include buying a car, placing funds in a term deposit, and lastly going on a holiday.
However, while all the above are justified choices, at Montara Wealth there are several frequent errors we see by people regularly concerning a newly acquired inheritance.
1. Not Processing Your Emotions :
It is often seen that people will rush into financial decisions without taking into account the emotional impact the inheritance has had.
Decisions that are made purely through emotion often are impulsive, and can be poor in nature.
Always take the adequate time to process your feelings and think through all of your decisions carefully.
2. Not Seeking Out Professional Financial Advice :
There are a lot of considerations when it comes to inheritance. With tax implications, it is always recommended to consult a financial advisor.
3. Splurging From The Start :
Using your inheritance to make exorbitant purchases from the jump such as a new car, luxury items, or an expensive vacation is never very wise.
Firstly, your financial security should be paramount.
Do you have debt?
Have you considered investing?
What are your future needs?
These all must be considered before you decide to indulge in a major purchase.
4. Not Looking Long-Term :
This is carrying on from the point above, but if you focus too heavily on the short-term, your long-term financial security may be in doubt.
Consider heavily what your long term goals are, and figure out how you can use your inheritance to make these a reality down the line.
5. Ignoring Tax Implications :
It is easy to be caught off guard by unexpected tax bills if you don’t understand the rules or fail to make tax-efficient decisions.
Make sure you consult with a tax professional so that you fully understand any obligations you may have.
They can also show you what tax deductions you can take advantage of, or where you can defer taxes.
6. Distributing The Inheritance Without Clear Communication :
It is very unwise to distribute inherited assets among family members or loved ones without clear communication or legal documentation.
This can result in misunderstandings, disputes, and level legal recourse if the inheritance involves complex assets or property.
If you do plan to share the inheritance, you must openly communicate with family members and seek out proper legal advice to ensure everything is handled transparently.
How a Financial Advisor Can Help Manage Your Inheritance
Especially if you haven’t had to manage a large sum of money in your life up to this point, it can be overwhelming, and when we are overwhelmed it often leads to poor decisions.
Gaining proper financial guidance from a professional ensures that you manage your wealth properly and get the most out of it at the same time.
A strong financial advisor will be able to help you in the following ways :
- Helping your understand how this windfall can help you achieve what you want in life for you and your family
- How to structure your investments
- What to invest in
- How to manage risk
- Advice on long-term financial moves that align with your goals
- Navigation of tax implications
- Understand inheritance laws
It is essential that you understand the legal, tax, and financial implications involved with a windfall inheritance so that you can manage it wisely.
With the right professional guidance you can ensure that your inheritance becomes a lasting source of financial security long into the future.
For many people that security is ultimately about retirement, and experienced retirement financial advisors in Sydney can help turn a one-off inheritance into lasting income.
Long-Term Investment Strategies for Inherited Wealth
Below is a helpful table created by the Montara Wealth team so you can gain a greater idea of some of the most common long-term investment strategies for windfall inheritance.
| Investment Strategy | Description | Benefits | Things To Consider |
| Superannuation Contributions | Contributing inherited wealth to your super fund, subject to contribution caps | Concessional tax rate (between 0 – 15% on contributions) and Long-Term Growth Potential |
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| Stock Market Investments | Investing in the share market or ETFs (Exchange-Traded Funds) | Potential for high returns over time. Easy to diversify. | Stock market volatility. Requires research or advice on investment selection |
| Real Estate Investment | Investing in residential or commercial properties, either through direct ownership or managed funds | Tangible assets that can appreciate in value. Easy to diversify through ETFs |
|
| Managed Funds & Unit Trusts | Pooling funds with other investors to invest in a diversified portfolio of assets |
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| Bonds & Fixed-Interest Investments | Purchasing government or corporate bonds for stable returns over time |
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| Term Deposits & Savings Accounts | Placing inherited funds into high-savings accounts or term deposits |
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| Ethical or Sustainable Investing | Investing in companies or funds that meet environmental, social, and governance (ESG) criteria |
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| Self-Managed Super Fund (SMSF) | Establishing your own super fund to manage investments, including inherited wealth |
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Protecting Your Inheritance from Legal and Financial Risks : Montara Wealth – Sydney’s Trusted Financial Advisors
When you are the recipient of a windfall inheritance, especially if it wasn’t one you were expecting, there’s a lot to consider.
Getting quality advice from a professional financial advisor in Australia can make a big difference in ensuring your money goes as far as you want it to.
Montara Wealth’s team of financial advisors in Sydney can help you develop a plan regarding investments, retirement planning, budgeting, tax strategies, estate planning, risk management, and wealth growth.
We offer a holistic and strategic approach to advice and help our clients to achieve financial stability and security by developing customised financial plans to achieve both short-term and long-term goals.
Montara Wealth is not aligned with any financial institution or bank and purely has the interest of our clients at heart.
Speak to our team today to start planning your financial future.
Contact us or call us on (02) 8330 3733.
Ethan Stein
Director and Senior Financial Planner
Ethan is a Director and Financial Advisor at Montara Wealth. His role is to build out exceptional strategic advice for clients centred around their financial and lifestyle goals. Ethan is passionate about establishing financially dynamic, long term strategies for his clients.
| N: | 02 8330 3733 |
| A: | Suite 1, Level 6/309-315 George St, Sydney NSW 2000 | GPO Box 4473, Sydney NSW 2001 |
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