Modify Your Investment Strategy for Inheritance

Setting your financial goals and meeting them is a huge success, and when you cross that threshold of financial security, you can look to modify your investment strategy for your heir’s inheritance plan. Your task is to ensure that your investment strategies are consistent with your estate planning goals—that is, your heirs will benefit from all your hard work and careful investments, with minimal tax implications.

Estate planning is only part of a will

Many people think that once they have a will and designate beneficiaries, that’s the end of it, so to speak. While that’s technically accurate, simply having a will doesn’t address anything beyond who gets what—there’s no way to guarantee that your assets are distributed absolutely according to your wishes. If you’re thinking either that your estate won’t be large enough to cause dissent among your heirs, or that your family isn’t like that, it’s important to understand that the size of your estate will grow over time, and that as families evolve, the dynamics and structure can change.

So don’t assume anything; designate in detail how you want your assets distributed and to whom. There are several ways to ensure your investment strategy meets your inheritance wishes, and that involves deliberate planning.

“In the next few years, over $3.5 trillion in assets will change hands via inheritance.”

There are two fundamental components of estate planning: finding the right investment strategies, and minimising the tax burdens for both your heirs and your estate.

Start with your super

Superannuation is the bedrock of estate planning for many Australians, but what many people don’t realise is that your super is not an estate asset; therefore any distribution of your super nest egg that’s set out in your will is invalid. Your super fund holds those assets in trust on your behalf, and the fund regulations govern who is eligible to receive that inheritance, and how it is distributed.

When you open or change a super account, you’ll complete a form that designates a beneficiary for those assets. These are the allowed beneficiaries:

• Your spouse or domestic partner. Former spouses are not included
• Children
• A financial dependent

If you want to add your super to your inheritance and estate, you will need a solicitor to name a legal personal representative (LPR)—typically your executor—and leave the super to that individual. If you want to leave your super to a sibling, your pets, or a charity, then an LPR is the route to make that happen.

Pros and cons of super inheritance as an investment strategy

Your heirs can roll a super inheritance into their own accounts, and benefit from a boost in their compound interest growth and lower taxes—15% on super gains, or 23.5% on outside gains. Also, a super inheritance is generally non-taxable, although there are some scenarios where a beneficiary will have to pay some inheritance taxes.

Here are some reasons to take a lump-sum withdrawal of your super assets and put the money into outside investment instruments:

1. Your heirs can’t spend the money until they are retirement age
2. If your heirs are successful enough to have their own super balances over $1.7 million, they’ll pay an excessive contribution tax.

Private investment portfolios

At some level of financial success, you’ve undoubtedly created an investment portfolio outside your super. These investments offer a broader range of opportunity than super, which is limited to government-sanctioned instruments. A diverse and balanced portfolio of stocks, bonds, and funds can be structured to minimise taxes and sequence risk against inflation for you, while preserving assets for your heirs.

From an estate standpoint, an individual portfolio allows you to designate exactly how your heirs receive the assets—that is, they must reach a certain age, or meet other benchmarks you set.

Trusts

An alternative to leaving your estate directly to your heirs is to establish a family trust for the assets. Trusts are a time-tested way to preserve wealth, as the goal is to protect the capital—the contributions from your estate—and place restrictions on the use of the dividends. Trusts that are properly created also have tax benefits that a direct inheritance may not avoid.

Advantages of a family trust for inheritance

Aside from the wealth protection umbrella a family trust offers, there are tax benefits for your heirs—primarily the 50% capital gains tax concession for investments. In plain English, this means that you only pay taxes on half of the annual gains. Individual beneficiaries pay taxes on their distributions, based on their own tax rates. If a family member doesn’t take any distributions in a tax year, they won’t owe any taxes.

Some tax disadvantages

In some cases, the trust will owe taxes at the end of the fiscal year.

• If a family member or beneficiary lives abroad, the trustee will owe taxes on their distributions
• Minors who take distributions in excess of $1,308 in a calendar year will owe a hefty 45% of the distribution
• Any undistributed income from the trust is also liable for the 45% marginal tax rate, so it is in the trustee;s interest to give away all the income the trust earns in a given year

Your financial advisor can offer some alternative asset-distribution strategies that are a bit outside the mainstream.

Gifts

You have the option of transferring assets to your heirs in the form of tax-free gifts. You can give up to $30,000 per beneficiary over a five-year period, as long as the gift does not exceed $10,000 in a calendar year. Gifts can be in the form of cash, stocks, bonds, or property.

There may be a capital gains tax associated with some non-cash gifts, so check with your tax advisor before making any decisions.

Insurance policies

Life insurance policies are also outside the purview of a will. When you name a spouse or child as the beneficiary, they receive the payout tax-free, and the face value of the policy is also excluded from the estate valuation.

Your financial advisor leads your investment strategy team

Complex estate planning requires a team of experts to ensure that your wishes are fulfilled when you’re gone. A trusted financial advisor is ideally suited to help you determine both your investment strategies and how to allocate your assets for inheritance when the time comes. Your tax advisor often works with your financial advisor to double check your planning from a tax perspective. A solicitor is responsible for writing and filing your will.