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What are some tips and traps for investors who come into significant wealth through inheritance?

Don’t just do something; stand there or, as others might phrase the cardinal rule of investing, stand there and make a plan.

Lack of an investment plan, when dealing with an inheritance or any other asset, is the single biggest trap for many who come into unexpected wealth. At its most elementary, such a plan might include paying down a mortgage and non-deductible debt, planning for children’s education and investing for retirement, more or less in that order.

Another tip for those who come into significant wealth through inheritance is to work with a qualified investment professional in devising that plan, so that it suits personal circumstances.

But getting beyond the obvious, sophisticated investors are increasingly interested in taking advantage of the tax benefits that can be realised by contributing inherited wealth to an existing superannuation fund.


Tip one: Maximise your super contributions

There is no inheritance tax in Australia, but the ATO can come calling when assets are sold or otherwise used to produce income. Contributing an inheritance to a super fund is a way to extend the tax benefit. Earnings are only taxed at 15 per cent, compared with the usual marginal rate. Income received from 55 to 60 attracts a 15 per cent tax rebate, and beyond age 60 it is tax free.

So, from a tax planning perspective, investing an inheritance via a super makes sense. But personal contributions are limited per financial year and exceeding the contribution cap will trigger a hefty 46.5 per cent tax for excessive non-concessional contributions. The trick is to say below the limit, which may be harder than first appears.

Tip two: But stay below the contribution cap

For 2015-17, the non-concessional contribution limit is $180,000 per person per financial year or $540,000 every three years if under 65. However, the calculation of whether the limit has been reached also takes into account salary sacrificed amounts, employer paid expenses on behalf of the fund, contributions from multiple employers or to multiple funds and expenses paid on behalf of the fund.

Valuing cash and shares is relatively straightforward, but other assets including real property, collectibles and other tangible goods may present more of a problem. Make sure to engage a qualified valuer to ensure that assets are valued correctly. An implausible valuation may lead you into the excess contribution trap.

Tip three: Remember the two-year window for the sale of a family home

If you inherit your family home, you may find yourself liable for capital gains tax. Assuming that a family member was living in the home up until death and the home was not used to produce income, you may be able to may avoid the CGT if you:

– sell the property within two years of the death, or;

– live in the property as your main place of residence until you sell it.

If you hold on to the property for more than two years, rent it out, and then sell it at a later date, CGT will apply to the difference between the purchase value and the sale price. Remember, though, that the rules may be different for property originally purchased after 1990.

The tax-free proceeds can then go toward any of priorities you have identified in your financial plan, including super contributions.

An unexpected windfall is a good problem to have. But maximising the value of an inheritance takes some planning. For many, investing through an existing superannuation fund may be the right move if carefully planned to avoid the risk of excess contributions.

Rolf Howard, managing partner, Owen Hodge Lawyers 

What are some tips and traps for investors who come into significant wealth through inheritance?
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