What to Do With Inheritance Money to Avoid Taxes

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The great news is Australia doesn’t have an inheritance tax. This means the money you inherit is yours without immediate extra taxation. However, how you manage that money can still have tax implications later on. 

This article is to discuss the strategies you can explore to make the most out of your inherited money.

Also read: How Much Money Can Be Legally Given To A Family Member As A Gift In Australia?

Strategies to Consider to Minimise Taxes on Inheritance Money

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) applies when you sell an asset, including inherited assets, that has grown in value since you acquired it. 

This means if you inherit shares or a property that are worth more than when the previous owner purchased them, you might need to pay CGT on that profit when you sell.  

However, there’s a strategic advantage in Australia: holding the asset for at least 12 months before selling might qualify you for a 50% discount on the CGT you owe. It’s important to remember that the cost base for an inherited asset is generally its market value at the time of the previous owner’s death. 

In some cases, like if the inherited asset was the deceased’s primary residence, you might be exempt from paying CGT altogether.  

Additionally, if  you have other investments with capital losses, you can use them to offset the gains from your inheritance, reducing your overall tax burden.

Income Tax

While you don’t pay tax directly on inheriting money, it’s important to be aware of income tax implications down the line. If you invest your inherited money and it earns income (things like interest from savings accounts or dividends from shares), this income is added to your regular taxable income.

That means you’ll pay tax on the additional income based on your overall tax bracket.  Understanding this aspect will help you with financial planning and avoid surprises when tax time rolls around.

Superannuation

Putting some of your inherited money into your superannuation (retirement savings) fund can be a smart tax-saving move while also growing your nest egg. 

Contributions to your super are often taxed at a lower rate than your regular income, offering potential tax benefits in the present. Plus, the money within your super fund grows with tax advantages, giving your retirement savings a significant boost.

Charitable Donations

Charitable donations are a great way to give back to your community while benefiting from tax deductions. If you donate a portion of your inheritance to a registered charity, you can generally claim those donations as a deduction on your tax return. This means you’ll reduce your taxable income, potentially putting you in a lower tax bracket.

Trust Structures

If you’ve received a large inheritance, it’s wise to explore the potential benefits of setting up a family trust. Consulting an estate lawyer is crucial as they’ll guide you on the complexities of trusts.  Family trusts can provide asset protection and offer strategic tax planning advantages in the long run. They provide flexibility in distributing your inheritance and managing its potential tax implications over time.

Remember, the best approach is to be thoughtful about managing your inherited money. Seeking professional guidance and understanding potential tax implications helps you make the most of this financial windfall.

Investing Wisely: Inheritance and Tax Savings

Our client, recently bereaved, had just inherited a significant sum. Concerned about potential taxes, she reached out to Walker Pender for guidance.  We advised the client on the benefits of investing her inheritance in her superannuation fund.

Superannuation contributions are taxed at a concessional rate, often lower than standard income tax. This strategy allowed the client to reduce her overall taxable income, resulting in substantial tax savings. Thanks to our expertise, the client was able to secure her financial future while minimising the tax burden on her inheritance.

Protect Your Inheritance from Taxes

Received an inheritance money? Don’t let hefty taxes reduce your windfall. Walker Pender’s estate lawyers are here to help you understand complex inheritance laws and develop smart strategies to minimise your tax liability.

Contact us today for a personalised consultation. Secure your inheritance and maximise its potential.

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