What is an inheritance and how does it work?

March 2021 – 4 minute read

Key takeaways from this article:

 

Two of the hardest topics are death and finances. Put the two together and it’s enough to stress anyone out. But these conversations are important and having them early can save you from further stress down the road.
 

Often before someone passes away, they create a Will that sets out how they want to distribute their assets when they pass. This is known as inheritance. From property and possessions, to cash and investment funds, everything distributed that belongs to the deceased is inheritance.
 

For some, this means inheriting their childhood home or a family heirloom. Many times, inheritance will involve the distribution of any remaining financial assets – savings, superannuation, investment funds etc.
 

It’s important to understand how the distribution of inheritance works so you can make a Will or understand how the deceased decided to distribute their estate.

Inheritance meaning

In law, inheritance implies that one person – the deceased – transfers assets to another – a beneficiary. The beneficiary implicitly accepts all rights and obligations that aren’t extinguished by death.

Types of Wills

When considering your estate plan, it’s important to consider the types of inheritance, or rather, the types of Will.

Simple Wills

A simple Will is a type of Will most suited to those with limited assets and are single or have had one marriage. These Wills are ‘simple’, as the name suggests, and they allocate the assets left behind to a loved one.

Complex Wills

A complex Will may contain specific provisions of how assets may be used and distributed. These are often used by individuals who had more than one marriage or children with more than one partner.

Testamentary Discretionary Trust Wills

These Wills leave assets to a testamentary trust from which the beneficiary may access the assets. These provide tax benefits and asset protection to the beneficiary or beneficiaries.

Mutual Wills

A mutual Will is a contract between partners that means the living partner takes control of the assets, and often sets limitations to how they may distribute their successive Will.

Special Trusts in Wills

Some circumstances call for special considerations. In instances where there may be a disabled or vulnerable beneficiary, this option ensures that they’ll be protected from being taken advantage of and ensures they’ll be provided for.

Inheritance law in Australia

The legal process of an inheritance really begins with the granting of a Will. Once a Will is granted, it determines what will happen to the estate of the person who grants it. This is the most effective way to control the transfer of assets after death.
 

When no Will has been made, the law most often grants assets to the partner of the person who has died. If there are children, then some of the estate may also go to them. There are also circumstances in which the estate will be apportioned to domestic or de factor partners. The law provides for the application of a ‘grant of letters’ that is submitted to the supreme court.
 

It’s worth mentioning, that while nobody is necessarily entitled to inheritance, a person may be in a position to challenge the legal Will on the ‘moral grounds’ that the deceased had an obligation to provide for them. If there’s no Will, no relatives and no application to the court, the estate will be given to the government.
 

A Will expressly states the deceased’s intentions, since the heirs are identified and many disputes between them are avoided. In any case, there are five basic steps to collect an inheritance that you should know.

How to collect inheritance:

Step 1) Obtain the death certificate.
 

Step 2) Request the certificate of last Wills and insurance contracts. You must wait until obtaining the certificate to start this process. It’s important that you request information about life insurance from the insurance company if relevant.
 

Step 3) Check if there is a Will and ask the notary for an authorised copy.
 

Step 4) Carry out the inventory of assets and debts. This is an important point. If you don't want an inheritance to become a problem, evaluate the net benefit of accepting it. In this way, you’ll collect the difference between the assets and any debt. If the debts are higher than the assets directly, you won’t accept the inheritance and thus you’ll avoid inheriting net debts.
 

Step 5) Liquidation and adjudication of the inheritance.

Do you pay tax on inheritance in Australia?

While many countries have an inheritance tax, Australian law is unique in that there is no tax law of inheritance. Any assets that are passed down to family members, will not be taxed – whether the assets are financial, property or otherwise.
 

However, any changes in the financial position of the inheritor are subject to tax. The most common tax liability for beneficiaries comes from income generated by the inherited assets. This can be income from a trust fund or the capital gains on the sale of assets.
 

In terms of superannuation, the super of the deceased will usually be organised by the superannuation fund, who will pay out any benefit as either a lump sum or an income stream. In some cases, the super will be liable to tax, but this will be assessed on a case-to-case basis.

What to do with inheritance?

If you’re receiving inheritance, you might feel uncertain with what to do with the assets you’ve inherited. It was important for the deceased to leave something behind for you. Have a think about what they might’ve wanted, and how the inheritance can be used in a way they would’ve liked.
 

Financial inheritance can be added to your retirements savings, or placed in an emergency account. Other common ways to use inheritance are using it to pay off debt, contributing to a place you can call home, or investing in shares.
 

If you have any questions about how to set up your inheritance, or receiving one, we’re here to help. You can set up a time to chat with a banker.