Estate Planning

If you are in the process of estate planning, you may be questioning the appropriate inheritance to leave your children.

Leaving an inheritance to your children is a wonderful and generous act, and one that many people wish to do to ensure their children and grandchildren live comfortable lives.

How much to leave (if any) can be difficult to determine, and will affect your own retirement plans.

For many people, the answer will be simple. Whatever is left when you pass on is what they inherit. This may include the house you were living in, and perhaps some amount of cash and/or other assets.

However if you have a high net worth, it becomes a bit trickier. We like this quote by Warren Buffett:

“I want to give my kids enough so that they could feel that they could do anything, but not so much that they could do nothing.”

If this quote resonates with you, here are a few things you can consider when determining how much inheritance to leave your children.

Restrictions: If you believe your children would burn through money too quickly, or are just not mature or responsible enough to handle their finances yet, you can consider putting restrictions on their access to the money. This could include only being able to access it at a certain age, or only being able to access certain amounts at a time.

Now or later?: Some people like to give their inheritance away while still alive so they can enjoy seeing the benefits it brings to their family. If you are considering this, make sure you take into account how much you actually need for the rest of your life. Please talk to your adviser about projected retirements costs, including the increased cost of healthcare and medical expenses. This can rise substantially in your later years and you don’t want to be caught short!

Fair distribution: Most people leave an equal distribution between their children, but not always. Reasons for not leaving equally include where one child is much more successful than others, or if a child is estranged. It’s up to you to decide, but be aware that leaving unequally often leads to resentment and fighting among siblings. For example, a successful child will think it’s unfair to be punished for working hard and achieving highly. If you do decide to distribute unequally, you should explain why, preferably in person before your death, but if you can’t face that, certainly leave a letter to be read afterwards.


How to pass on your legacy

There are various ways to pass on your wealth to your children. Below we’ll discuss some of the ways and the possible tax implications.

Property: Property is the most common inheritance that children receive. The inherited property does not attract any tax, however capital gains tax can be an issue if your children then sell that property. If the property was the main residence before death, it can be sold within two years of death without attracting capital gains tax. However if the property was rented out, capital gains tax could be a factor.

Investment bonds: Investment bonds are another good way to pass on wealth. Money is put into a fund that’s managed and passed onto your children when you die. They are internally taxed, so the income doesn’t need to be declared.

A trust: You can create a trust and appoint a trustee to manage distributions of money to your children.

Mortgage offset: An effective way to provide money to your children is by transferring it to their mortgage offset account. This ensures the money is used responsibly and the interest saved on the home loan will save them in the long run.

Your superannuation: Another option is to put extra money into your own superannuation account, which transfers into your child’s name through a tax death benefit pension. Because it is from super, it is tax-free income.

Leaving your financial legacy can be complicated and confusing, with tax laws that change all the time. Please talk to your adviser about the best way to leave your inheritance, to ensure your children receive everything you want them to.