Death and money: five ways to prevent a wasted inheritance

These five tips can help prevent a wasted inheritance as trillions of dollars pass from baby boomers to younger generations.

Inheritances are set to surge in size and frequency in the coming years amid the biggest transfer of wealth in the nation’s history.

As Australia’s richest generation, the baby boomers, move through retirement, many are starting to think about what happens to their wealth once they’re gone.

Children will be the biggest beneficiaries of the estimated $5 trillion transfer, but grandchildren will benefit too as people live longer and leave inheritances later.

Some children are already richer than their ageing parents, courtesy of a full career of earning compulsory superannuation, which only started in 1993.

But what seems like a small inheritance to a well-off child will mean everything to their parent, because to the parent it is everything – all the wealth they have.

Whoever gets the assets, a big worry for retirees is that their kids don’t put it all on black at the casino, or blow their inheritance in other ways.

However, there are several ways to have some say over your wealth from the grave.

1. TALK FIRST, DIE LATER

Communicating with loved ones about inheritances and estate planning is vital to avoid potential family fights after you’re gone.

Many times disgruntled children have taken their siblings and others to court to try to chase what they feel they deserve.

Discuss your assets and ask for their thoughts, as this may impact both inheritances and future moves into aged care, which has various assets and income tests.

Children and grandchildren will inherit trillions of dollars in coming decades. Picture: iStock

2. IN TRUSTS WE TRUST

Experts say the best way to protect an inheritance from being wasted is by using a testamentary trust, which is established by your will when you die.

These trusts have tax and asset protection benefits, and give parents the ability to appoint experts to look after things for a while. Parents can choose who gets what, and when.

Testamentary trusts can span two or three generations, and can protect the deceased’s own children in the event of a second marriage or de facto relationship where the surviving spouse wants to hand all the wealth to their own children.

3. TRAINING WHEELS

Coote Family Lawyers partner Suzanne Jones says people can set up a testamentary trust in their will and give it “training wheels”, where the children are a co-trustee with either the will’s executor or an adviser.

“A two-year training period works well before beneficiaries take sole control of their inheritance,” Jones says.

“During this period the beneficiaries can be guided on the way the testamentary trust operates, how to maximise the tax and asset protection benefits of a testamentary trust, and the sorts of decisions that have to be made and when,” she says.

4. STAGGERING CONTROL

Jones says parents can use testamentary trusts to stagger the inheritance.

“Sometimes a gift of $100,000 at age 21 and the balance of their share of the estate when they turn 25 gives beneficiaries some experience in investment and handling finances,” she says.

Other money experts agree with this strategy, with money released in several bites. They say it gives the children a chance to make a financial mistake, learn from that mistake, and – hopefully after getting some good advice – not make it again.

5. CHOOSE CHARITIES

Your children can’t waste your entire legacy if they don’t get all of it.

As older Australians grow wealthier, more people are leaving money to chosen charities, or setting up charitable trusts and funds to ensure some of their wealth keeps helping others for decades.

This might inspire their kids to do the same.

Originally published as Death and money: five ways to prevent a wasted inheritance