The Perils of Inheritance Impatience

If Charles Dickens was writing his novel Great Expectations now, it’s likely that his protagonist Pip would be desperate to get his hands on an inheritance rather than dreaming of  becoming a blacksmith and a gentleman.

Given the current cost of living crisis, a distinct lack of intergenerational equity and a massive estimated $4.9 trillion generational wealth transfer which is underway, inheritance seems to be one of the main sources of wealth that particularly younger people are looking forward to getting their hands on.

Perhaps unsurprisingly, the greatest of expectations belong to the youngest adult children.

Optimism Starts with the Young

A study by Colonial First State found that these younger adult children aged between 18 and 29 expect to get $525,000 in their inheritance, compared to just half of that being expected by the 50- to 64-year-old adults.

These numbers might show that expectations wane as reality sets in and aged care costs mount, although perhaps the younger hopeful inheritors are factoring in inflation?

Already one in six Australians or 18% have inherited some form of wealth from a family member, with 38% expecting to do so.

Most Australians (82%) want to leave their family members an inheritance, but the cost of aged care and general long-term living costs may lead to some lesser great expectations being met then they first anticipated.

In Australia at the moment, the high cost of property has seen an earlier form of inheritance in the form of the “Bank of Mum and Dad” increasingly being used to help young adults into their first home, often but not always with no expectation of any repayment.

Bank of Mum and Dad a Big Lender

The Bank of Mum and Dad now sits somewhere between Australia’s fifth and ninth-largest lender, with the average home-loan deposit help now given by parents $74,040 according to Mozo – $4,113 more than in 2021.

It is a very lenient bank too, with 75% of parents no longer expecting to be repaid, up from just 33% in 2021.

Once again, pragmatism and the awkwardness of demanding repayment seems to win the day.

The dangers of such a loose approach are also becoming apparent with the “living inheritance” model having the potential to greatly improve the lives of younger generations but also to jeopardise the livelihoods of their parents if the generosity has been too great.

Longevity an Open Question

It is one of the great uncertainties of life that none of us know how long we will live or how expensive those later years might be due to aged care needs and medical costs, with even once healthy inheritances being greatly reduced by a protracted period of aged care.

The Colonial First State survey showed that the main channel for inheritance is from parents to their children (29%) with grandparents (17%) the next most common source.

The most common form of inheritance is cash or remaining super (78%) or the family home (76%) followed by with cars and vehicles (60%), investments (38%) and collectibles (32%) and pension benefits and annuities at 23%.

Some Precautions to Consider

There are some sensible precautions to take all around to protect and improve inheritances.

One is to document loans from the Bank of Mum and Dad with a condition that they must be repaid with a nominated time for that to happen.

This provides a level of protection if a child goes through a divorce because the gift remains a liability rather than an asset so the money will have more chance of staying in the direct family rather than being carved up through the divorce process.

Gifts can Cause Pension Trouble

Another thing to watch is that while there is no gift tax in Australia, age pensions can be cut back through gifts that are not spaced according to the rules.

Under the deprivation of assets rules, you can give away only $10,000 a financial year, or $30,000 over five years, without affecting your eligibility for the age pension.

One skeleton key to the inheritance maze is to have a valid will in place, with repeated surveys showing that less than 50% of people have one, and with will disputes on the rise, it must be well drafted and reasonable so as to avoid any costly disputes after your death.

As you can see, the whole idea of inheritance can give rise to some great expectations all round and great care needs to be exercised about how and when an inheritance is delivered.