Receiving an inheritance is often life changing. Whether it’s a modest sum or a significant windfall, this sudden boost to your financial position presents both opportunity and responsibility. Without a clear plan, it’s easy to make short-sighted decisions, or no decisions at all! But with a smart, informed strategy, inheritance money can be powerfully leveraged for long-term wealth, stability, and even personal fulfilment.
There’s no one-size-fits-all approach to managing inheritance money as everyone’s situation, goals, and objects are unique. That being said, here are six strategies you can consider to use your inheritance money wisely.
1. Investing for wealth creation and income generation
Strategic investing can compound your wealth over time and provide you with an additional source of income. Have you considered:
- A diversified share portfolio for long-term growth and/or income generation
- Australian Shares have an average annual return of circa 9%, comprised of roughly equal components of income (in the form of dividends) and capital growth. Shares have outperformed most other asset classes over the long term.
- Owning a diversified portfolio of listed shares reduces the volatility & risk of your portfolio and provides you with exposure to many of the world’s best and most profitable companies.
- A portfolio of listed shares provides you with liquidity – that is the ability to easily sell your holdings to cash.
- Compare shares with property: You can sell your share portfolio and have your cash back in two days. Property takes considerably longer.
- BlueRock Investments specialises in providing professional advice tailored to building and protecting your wealth.
2. Boost Your Super
Adding to your superannuation can be a powerful way to boost your retirement savings. Contributions can also carry tax advantages, especially if you’re nearing retirement age.
- Because of the advantages of superannuation there are limits to how much you can contribute to superannuation each year – chat to one of our advisors to discuss how you can maximise your super contributions.
- Have you considered establishing a Self Managed Super Fund (SMSF) ? SMSFs allow for up to six members to combine their superannuation balances into one and invest together. SMSFs also allow for greater control over your investments and pension payments.
3. Pay Off Debt
Reducing or paying off your mortgage is an important consideration when thinking about how to utilise your inheritance. Paying off your mortgage may considerably increase your cash flow and may provide you with a sense of security. But if you pay off your loan, what will you do with the increased cash flow? Will you travel more? Contribute extra to your superannuation fund? Or will you create a regular investment plan? These are the questions a financial advisor can help you answer.
Have You Considered Debt recycling?
This involves paying down ‘bad debt’ (non-tax deductible debt) and replacing it with ‘good debt’ (tax deductible debt) on your home loan for investment purposes. This strategy is multi-faceted, it can reduce your non-deductible debt, build an investment portfolio, and increase your tax deductions.
4. Establish tax-effective entities
With good structuring, inheritance money can be managed in a tax-effective way:
- Investing via tax-advantaged structures (like family trusts or superannuation)
- Using franking credits from a share portfolio to reduce taxable income
- Gifting strategies and philanthropy, such as donations to DGR-1 status charities, or establishing your own perpetual ‘Giving Fund’ through a once off tax deductible donation, can also be considered. More on that in point 6.
5. Treat yourself
A portion of your inheritance can—and arguably should—be used for personal enjoyment. Whether that’s a holiday you have always wanted to go on, a home renovation you’ve been planning for years, or a classic car or beautiful painting, allowing for lifestyle rewards can make the inheritance experience more fulfilling.
A financial advisor can help you consider it in the context of your overall financial position, so you don’t get carried away.
6. Give back
Donating to causes you care about can create lasting impact. You might consider:
- Creating a perpetual charitable foundation. We can help you establish a tax-deductible charitable foundation for as little as $50,000 donation.
- Supporting intergenerational wealth transfer to children or grandchildren. Some choose not to wait till they have passed to share their inheritance – instead they share while they are still here.
Case Studies: Successful Management of Inheritance Windfall
Case 1: $1,000,000 inheritance
This client received an inheritance of $1,000,000 and invested it with BlueRock Investments in 2016. All income has been reinvested and her portfolio has grown at a rate of 11% per annum on average, growing to over $2,700,000 today.
Case 2: $600,000 inheritance
This client received a $600,000 inheritance and used it to reduce their mortgage from $700,000 to $100,000. The client then re-borrowed $600,000 against their house and used the proceeds to invest in a diversified portfolio. The clients are now a diversified portfolio growing their wealth, while also having the tax deduction of the interest paid on the $600,000 investment loan.
Case 3: $500,000 inheritance
This client received $500,000 as an inheritance. The client contributed the majority to superannuation, established a Self Managed Superfund, and optimised his tax position while growing his retirement balance. He used the rest to travel on a well-deserved holiday to Europe.
Receiving an Inheritance? Take Time, Seek Advice, and Make It Count
When thinking about what to do with inheritance money, it’s essential to pause, reflect, and plan. This is a unique opportunity to establish and grow your financial future, whether that means reducing debt, growing wealth, or enjoying some well-earned rewards.
If you've recently received an inheritance and are unsure where to start, our wealth management advisors can help. For a no obligation, no charge discussion, reach out via the form below for a confidential discussion and make your inheritance count.
Disclaimer: The content is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information in regard to these factors before acting or seek advice before making any financial decisions. Blue Rock Investments (Melb) Pty Ltd is the holder of an Australian Financial Services Licence (AFSL No: 335588).
