How you can be worse off after receiving an inheritance – and how to avoid it

Many Australians receive a significant inheritance from loved ones at some point in their lives, but it seems now many are banking on it. Figures show about 29 per cent of Australians are expecting an inheritance and they intend to spend some or all of it  to purchase property or pay off existing debt.

This is a frightening thought – that financial decisions are being made on the assumption of a future inheritance. If a financial windfall is on the horizon, planning for it is a good idea, but you can never know the true state of someone’s financial affairs, nor can you accurately predict when you will receive it.

An inheritance can be life changing, however, it is not a guarantee of future wealth. In fact, it’s common for those who receive an inheritance to experience no change to their long-term financial situation and, in some cases, even be worse off.

Why is this the case?

The decisions you make shortly after receiving an inheritance can make a huge difference to the impact it has on your life in the long term. Here are some common mistakes to avoid when you receive an inheritance:

• Making rash or risky decisions

By the very nature of them, inheritances tend to be received at a period of heightened emotions, making it hard to make the most rational decisions. Sometimes in these situations people can make rash decisions, such as buying luxury goods or holidays, or investing unwisely, chasing big returns or limiting investments to a single area.

• Making no decisions

At the opposite end of the scale, some people are unsure about or overwhelmed with their options when they inherit and as a result, put off doing anything with the money. Just letting money sit without growing or putting it to work for you can mean you lose out in the long term.

• Not understanding tax implications

It was Benjamin Franklin that said: “In this world nothing can be said to be certain, except death and taxes” and this is never truer than when you inherit. Many people make decisions about inheritance without understanding the implications it has on tax. This is especially important for those that inherit assets such as property or shares, which if not handled aptly, can be subjected to significant capital gains tax.

• Not paying off debt

An inheritance is a great opportunity to reduce or eliminate any debt that you may have. You don’t need to use your entire windfall to become debt free, but if you have a large amount of debt at a high interest rate then it will be difficult to get ahead later in life if you don’t take the opportunity to reduce it now.

• Not seeking expert advice

Many of the above mistakes come down to making decisions without all of the available knowledge, at a time when decision-making is liable to be impacted by emotion. It is also a time when well-meaning family members can offer advice on what to do with a loved one’s money. But taking uninformed advice, however well meaning, can be detrimental.

An expert adviser, on the other hand, has a wealth of knowledge and can provide practical advice at a time when it is needed the most. They can help you map your long-term financial goals and create a plan for achieving them, while navigating tax implications to ensure you grow your inheritance.

At the end of the day, an inheritance is a loved one’s way of continuing to play a role in your future when they are no longer around. Making the most of your inheritance and ensuring it has the biggest impact on your life, such as becoming debt-free, early retirement or a university education for your children, is what it was intended for.