Key takeaways
- Start the conversation early so those who are likely to inherit your money and assets are aware.
- There are strategies that can help to ensure your wealth passes in a tax-efficient manner.
- Trusts can be beneficial if you want your wealth to remain with your direct family members.
We spend a lifetime generating wealth but few of us spend the time to ensure it’s passed on in the way we want it to.
Having a plan in place to transfer your wealth, will help those who are inheriting it, understand your intentions and the process.
While there isn’t a one-size-fits-all approach, we’ve highlighted a few considerations to get you started.
Wealth transfer tip #1: Start the conversation early
Many people find it hard to discuss subjects like death and the future division of wealth, particularly when many family members are involved.
But there’s a lot to be said for having open discussions about how assets and future inheritances will be divided.
This will help your beneficiaries—those receiving your wealth—prepare and have a planned purpose for how it could be used. It also means they have time to seek professional help if needed.
Another benefit of these conversations is they present an opportunity to talk about any long-term goals you may have. For instance, you may want those inheriting your money to set up a retirement account, allocate it to their kids’ education or support a cause you love.
Wealth transfer tip #2: Investigate tax savings
There may be strategies that can help to ensure your wealth passes in a tax-efficient manner.
Super
While super is a significant component of retirement planning, it can also serve as an effective means of transferring wealth to loved ones.
Ensuring that any super you have left over at the time of your passing is distributed according to your wishes, generally requires you to complete a binding death benefit nomination provided by your super fund.
It’s important to be aware that upon death your beneficiaries may be charged tax on this money, depending on their relationship with you. For example:
- A spouse or dependent child typically receives your super benefit tax-free
- Non-dependents, such as adult children, may need to pay tax on your super benefit
- Financial dependents and other beneficiaries may have different tax obligations.
If it is likely that non-dependents will receive your super upon your death, a possible option is to withdraw part or all of your super during your lifetime to reduce tax payable.
Gifting
Transferring wealth via gifting can be a good option. It may however, affect you financially if you’re receiving social security benefits such as the Age Pension and you exceed the gifting limits.
You’re entitled to gift up to $10,000 in cash gifts and assets in one financial year. You can also gift up to $30,000 over five consecutive years. If you exceed this limit, Centrelink assess the excess amount as an asset and deem the income, for a five-year period.
An alternative to gifting that you may prefer is loaning wealth to family members. A loan to a family member may not affect a social security benefit and can usually be recalled if, for example, the family member’s marriage or de facto relationship breaks down.
Wealth transfer tip #3: Consider setting up a trust
Some people choose to pass their wealth to younger generations through a testamentary trust, rather than leave all their assets directly to them.
One of the main benefits of testamentary trusts is they can enable your wealth to remain with your direct family members. It also enables wealth to pass in a manner that protects beneficiaries who may be vulnerable due to marriage or a relationship breakdown, or due to their profession or a business they operate.
In other cases, testamentary trusts can preserve your wealth by ensuring it’s not misspent by beneficiaries on poor lifestyle choices or investment decisions, for example.
Tax benefits of trusts
These trusts, which are written into the will when planning your estate affairs, can have significant tax benefits too.
For example, if a beneficiary receives their inheritance under their personal name, they may be liable to pay additional tax on investment earnings or capital gains at their personal marginal tax rate (the tax rate they pay on their income).
However, a testamentary trust may lower the overall tax liability. This is because the income can be split with the beneficiary’s other family members, including young children.
Depending on your circumstances, you may even choose to set up separate trusts for each beneficiary. This will enable them to invest the way they want and manage their finances independently over the long-term.
Wealth transfer tip #4: Write a will and update it
One of the simplest things that people often overlook is writing a will.
This document is the mechanism for any successful wealth transfer plan and must be updated regularly to ensure any major life changes are accounted for. This can include anything from getting married or having children, to selling the family home.
Wealth transfer tip #5: Seek help from a professional
If you value the experience of experts in other aspects of your life, don’t discount it when it comes to managing your life savings.
A financial adviser can develop and execute a wealth transfer plan. They can also recommend other suitable professionals such as accountants and lawyers to assist with drafting wills, establishing trusts, and other legal documents to ensure your wishes are carried out.
More importantly, you can get help to answer questions like:
- How can I ensure my wealth is transferred to my children?
- What strategies can I use to build my wealth?
- What age can I stop working and retire?
Frequently Asked Questions
Are there any tax implications to wealth transfer?
Yes, there can be tax implications including capital gains tax and estate taxes. Consulting with a tax professional or financial adviser is recommended.
Can I transfer wealth while I’m alive, or does it have to wait until my death?
You can transfer wealth during your lifetime through gifting, setting up trusts, or other means. The choice may depend on your goals and circumstances.
How can I ensure my wealth is used responsibly by the next generation?
You can include terms in trusts or your estate plan (will).
How can I protect my wealth from legal or financial challenges after I pass away?
Asset protection strategies, like trusts and insurance, can help shield your wealth from creditors and legal claims.
*Based on KPMG Super Insights 2023 Report as at May 2023 KPMG Super Insights 2023 Report https://assets.kpmg.com/content/dam/kpmg/au/pdf/2023/super-insights-2023-report.pdf
The information in this article is current as at June 2024 and may be subject to change. The information in this article is factual in nature only and does not and is not intended to imply any recommendation or opinion about a financial product. You should obtain appropriate advice before making any decisions based on the information in this article.
The Financial Coaches provide financial advice under the Australian Financial Services licence (AFSL) of Actuate Alliance Services Pty Ltd ABN 40 083 233 925 AFSL 240 959 (Actuate). NULIS Nominees (Australia) Limited ABN 80 008 515 633, AFSL 236465 (NULIS) is the trustee of MLC Super Fund ABN 70 732 426 024 (Fund). Actuate and NULIS are both companies within Insignia Financial Group which comprises Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (Insignia Financial Group). No other entity within Insignia Financial Group, including NULIS or any other entity within the Insignia Financial Group that is a trustee for a regulated superannuation fund, is liable for or responsible for any work, action or advice provided by Actuate.