Death and money: inheritance traps that can hurt your family

The death of a loved one can spark ferocious family fights over money and other assets. Watch out for these inheritance traps.

Proper planning is vital to avoid family fights over inheritances. Picture: iStock

Ahead of trillions of dollars of wealth transferring across generations in the years ahead, talk of inheritances is increasingly rapidly – both among ageing parents and their hopeful children and grandchildren.

Inheritances are like a lottery, literally. For some people, it may be positive and life-changing, while for others inheritances can spark a family war that never ends. And for many, they get absolutely nothing – just like most lottery tickets.

Older Australians should think more about the inheritances and legacy they will leave, even though that means contemplating their own death, which nobody likes doing.

Mistakes and other factors can turn inheritances into nightmares, and it doesn’t have to be a large amount to wreak havoc. Family lawyers say some of the fiercest battles between siblings and other relatives over inheritances have been over relatively small amount below $100,000.

While every family is different, there are similar factors that ruin inheritances. Here are five.

1. POOR COMMUNICATION

Failing to make clear your wishes in advance can be a ticket to a nasty family fight.

Ageing parents and their adult children should try to discuss all estate planning issues around superannuation, wills, cremation or burial, powers of attorney, and reasons around why decisions are being made about potential inheritances.

Inheritance issues can cause severe stress for seniors. Picture: iStock

Sibling relationships can be destroyed because a parent was unclear. Talking about death is uncomfortable, but not talking about it can be worse.

2. TAX

Australia does not have a death tax, but there are still ways inheritances can be taxed.

Our superannuation has a de facto death tax, where money left to non-dependants – such as adult children – can be taxed after a parent dies. There are ways to avoid this, including withdrawing all your super just before you can die (if you can time that) and using a re-contribution strategy set up with help from a financial planner.

Also, capital gains tax can apply on inherited assets after two years, so seek advice.

3. BLENDED FAMILIES

Second and third marriages are much more common than in decades past, as so is wealth, and can spark huge inheritance fights.

Let’s say mum or dad dies and leaves all of their assets to their second spouse, who later dies and leaves all of that wealth to their own children – so the kids of the first parent to die get diddly-squat.

Good estate planning and legal advice can prevent this.

4. TOO MUCH MONEY

For some people, there is no such thing as having too much wealth, but when it comes to inheritances, there can be.

Our ageing population means many people receiving inheritances are already retired and receiving a pension or other government benefits.

A lump sum of cash can impact their entitlements, and while they’re still likely to be better off financially, much of the benefit of the inheritance may disappear.

At the other end of the scale are huge inheritances, and the effect they can have on recipients – even when the parent is years from death. Wealthy parents worry that a future inheritance may destroy their kids’ drive and ambition – often with good reason.

5. GREED

Unlike the famous mantra from the movie Wall Street, greed is not good.

It’s why families dissolve into warring factions fighting over inheritances, why elder abuse is growing as or population ages and people lose patience, and why lawyers make a lot of money.

Inheritances can be a powerful tool for good, but senior Australians should wield them wisely.

Originally published as Death and money: inheritance traps that can hurt your family