For many Australians, receiving a large inheritance is a once-in-a-lifetime event. While it can bring enormous opportunity, it can also raise tough questions: Do we pay off the mortgage? Should we invest? How do we balance today’s lifestyle with tomorrow’s security?

 

What you should do really depends on your situation.

 

Let’s look at how I would help one couple approach it.

 

Sarah and James are both 40, living in Sydney with their two children, aged 8 and 10. They earn $140,000 each and have a $500,000 mortgage. After tax they bring home $200,000. With mortgage repayments of around $40,000 and living expenses of $120,000 they can save about $40,000 a year. Life is busy but they are comfortable.

 

Their Nana left them a $1 million inheritance and they both have $200,000 in super.

 

Step 1: Stop and assess the situation.

It is important to understand what they want. For this, let’s assume they want to have the flexibility of being able to retire in the next 15 years and build a family legacy.

 

Step 2: Clear the Mortgage

Wiping out the $500,000 mortgage leaves them with an extra $40,000 a year in savings. And more importantly, no debt that isn’t tax deductible.

 

Step 3: Put in place a safety net

Put $60,000 in a high-interest savings account. This is their emergency fund — allows them to cover at least six months of living expenses.

Steps on what to do with $1 million inheritance
Step 4: Build long-term wealth tax effectively

With the debt gone and their safety net in place, Sarah and James turn to investing for the future.  They see this investment as more about their children than themselves and as such take a long-term view.

They borrow $500,000 and invest this and the remaining $460,000 of the inheritance in a diversified portfolio of Exchange Traded Funds. At 8% growth and reinvesting the dividends, the ETF portfolio (less the debt) will be worth more than $2.5 million in 15 years’ time.

Further, they have held this in a discretionary trust, as that will allow them to divert future dividends to whoever is the most tax advantaged. It won’t make a big difference straight away, but over time (especially once the kids are 18), there are significant advantages.

Step 5: Maximise Super contributions

Their employer is contributing $16,800 into super already, but they can still put in more.

Firstly, contribute up to the maximum concessional super cap. Currently it is $30,000. Therefore, between them they can contribute $26,400 a year and claim it as a tax deduction. This will save them over $4,500 in tax a year. In 20 years, they will have around $2 million in super. Each.

Secondly, put the rest of their surplus funds into super as a non-concessional contribution. The reason for this is any earnings on this is taxed at 15% (instead of their marginal tax rate of 37%).

Assuming they only put $20,000 a year extra into super each, in 20 years’ time this would give them an extra $650,000 each.

In 20 years, between them they could have $5.3 million in super. Even better, under the current rules this would be tax free.

Step 6: Review their insurance and estate plans

There is now a lot more at stake. It is important that they have the right insurance (which could even be less than they have now) and their estate plans are up to date and deal with the money tax effectively.

The Bottom Line

Receiving a $1 million inheritance at age 40 is an incredible opportunity. Don’t waste it.

We specialise in helping professionals and executives grow and protect their wealth so they can live an abundant life. If you would like to discuss how you could benefit from independent financial advice, book a chat via the button below or contact us on 02 6269 3339 or at team@constructwealth.com.au.

About the Author
Phil Harvey is an independent financial adviser. In 2017 Phil set up his company Construct Wealth to help clients best manage their finances so they focus on what is important to them. He is a founding member of the Profession of Independent Financial Advisers and a tax financial adviser.

General Advice Warning
This advice contains general information. It may not be suitable to you because it does not consider your personal circumstances. Phil Harvey and Construct Wealth are authorised representatives of Independent Financial Advisers Australia (AFSL 464629 – ABN 61 601 365 904).

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