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What to Do with an Inheritance: A Practical Guide

Published 19/11/2024 | Last Updated 27/11/2024

Written by:
Joel Simmonds
Head of Advice  

Inheriting money, property, or investments can be life-changing. While it provides opportunities for financial growth, it can also feel overwhelming if you’re unsure of what steps to take.

Whether you’re wondering what to do with an inherited house, how to invest inheritance money, or how to handle debts, this guide will provide practical, detailed advice to help you make confident decisions.

Table of Contents

Take Your Time: Don’t Rush Into Decisions

The immediate aftermath of receiving an inheritance can feel emotional and overwhelming. You may feel pressure to act quickly, especially if you’ve inherited significant assets or if others are offering advice. However, rushing into decisions about inheritance money, property, or investments can lead to mistakes you regret later.

Why Taking Time Matters:

  • Emotional decisions often result in selling or spending assets without fully understanding their value or impact. For example, selling an inherited property too quickly might trigger Capital Gains Tax (CGT) or miss out on long-term financial opportunities.
  • Grieving can cloud judgment, and it’s important to allow yourself time to process your emotions before tackling financial matters.

Practical Advice:

  • Pause before making major financial moves.
  • Create a “holding account” for cash inheritances, giving yourself time to research options before investing or spending.
  • Discuss your situation with a trusted friend, family member, or adviser who can offer perspective.

Get Support

Inheriting assets is both a financial and emotional responsibility. Seeking the right support can help you manage the pressure and avoid common pitfalls.

  • Emotional Support: Share your feelings with trusted family members, friends, or a grief counsellor. They can help you navigate the emotions that come with loss and responsibility.
  • Professional Support: For larger or more complex inheritances, working with a financial adviser, tax accountant, and estate lawyer can save you from costly mistakes. These professionals can guide you through areas like tax implications, investment strategies, and the legal aspects of inheritance.

Avoid Rash Decisions

It’s easy to feel pressure to act quickly — selling a house, paying off debts, or making big purchases. Rushing can lead to decisions you might regret. Instead, take the time to assess your options carefully.

What We’ve Learned from Helping Others

At our practice, we’ve helped countless Australians manage their inheritances, and we’ve observed common mistakes. Many people feel compelled to act too quickly, leading to choices they later regret.

  • Selling inherited property immediately without understanding financial implications, such as CGT.
  • Impulse spending on large purchases, like cars or holidays, which leave little for long-term financial goals.
  • Keeping underperforming investments out of sentimentality or fear of change.

An inheritance can feel like a windfall, but it’s also a long-term responsibility. By pausing, planning, and seeking advice, you can avoid these mistakes, make informed decisions, and honour your loved one’s legacy.

Tax Implications of Inheriting Money, Property, or Investments

Taxes are a significant concern for Australians managing an inheritance. Understanding the rules can help you avoid surprises and plan effectively.

Key Tax Rules:

  • Cash Inheritance:

    • Not taxed as income in Australia.
    • Income generated from investments (e.g., dividends or interest) is taxable.

  • Inherited Property:

    • Capital Gains Tax (CGT): Applies when you sell the property. Exemptions may reduce CGT if the property was the deceased’s primary residence.
    • For investment properties, CGT is based on the property’s value at inheritance.

  • Inherited Investments:

    • Selling shares, ETFs, or managed funds can trigger CGT. The “cost base” (asset value at inheritance) determines your liability.

Practical Steps:

  • Work with a tax accountant to clarify your obligations and develop a tax plan.
  • Keep detailed records, including valuations, receipts, and property costs, to support future tax filings.

Understanding the Process of Inheriting Assets

Before deciding what to do with your inheritance, it’s helpful to understand how the process works.

1. Estate Settlement and Ownership Transfer

  • The will must go through probate, a legal process to validate the will and ensure debts are paid.
  • Once probate is complete, property, investments, or cash funds are transferred to the beneficiaries.

2. Understanding Obligations Beyond Taxes

  • Property Ownership: You may need to update titles or manage outstanding mortgages.
  • Investments: Shares and managed funds must be re-registered in your name.

What to Do with an Inherited House

Inheriting a house can feel like both a financial opportunity and a responsibility. Your decision depends on your financial situation, the property’s condition, and your goals.

Your Options:

1. Keep the House

  • Why Keep It?
    • Sentimental value or plans to use it as your primary residence.
    • If it becomes your primary home, you may qualify for a CGT exemption when selling later.
  • What to Consider:
    • Can you afford ongoing costs like rates, insurance, and maintenance?
    • Does the property align with your long-term goals?

2. Rent the House

  • Why Rent It?
    • Generate passive income while retaining ownership.
    • This option is especially appealing if the property is already a rental investment property.
  • What to Consider:
    • Are you comfortable managing tenants and property upkeep?
    • Rental income is taxable, and CGT may apply if you sell the property in the future.

3. Sell the House

  • Why Sell It?
    • Free up funds for other priorities, like paying off debt, investing, or purchasing another property.
  • What to Consider:
    • CGT on Inherited Investment Property: If the house wasn’t the deceased’s primary residence, CGT will likely apply. Consult a tax accountant for advice.
    • Emotional considerations: Selling a family home may be difficult if there’s sentimental attachment.

Common Mistakes

  • Not getting a proper valuation done.
  • Selling too quickly due to emotional overwhelm.
  • Forgetting about CGT when selling an inherited investment property.

Managing Inheritance Money

Receiving a cash inheritance opens doors to financial possibilities. But the question remains: what to do with inheritance money in Australia?

Step 1: Create an Emergency Fund

An emergency fund provides financial security for unexpected expenses. Aim to save at least three to six months of living expenses in a high-interest savings account or an offset account.

Why It’s Important:

  • Covers emergencies like medical bills, car repairs, or unexpected job loss.
  • Prevents reliance on credit cards or loans for short-term financial crises.

Step 2: Pay Off High-Interest Debt or Important Bills

Consider using part of your inheritance for immediate needs, such as:

  • Credit cards, personal loans, or high interest car loans.
  • Home repairs or maintenance.
  • Education costs.
  • Replacing (only if necessary) or repairing your car. 

3. Set Aside for Long-Term Goals:

Avoid spending large amounts on wants instead of needs. This includes things like impulse purchases, luxury items or lifestyle upgrades that don’t align with your long-term goals.

  • Always ask yourself: “Is this a need or a want?” 
  • Keep a portion of the inheritance accessible while you evaluate longer-term plans like investing or contributing to your superannuation.

Should You Pay Off Your Mortgage with an Inheritance?

Deciding whether to use your inheritance to pay off your mortgage depends on your financial goals and the interest rate of your loan.

Benefits:

  • Eliminates monthly repayments and reduces financial stress.
  • Provides a guaranteed return by saving on interest costs.

Drawbacks:

  • Tying up all your inheritance in your home leaves you with less accessible cash for emergencies or investments.

A Balanced Approach: Offset Accounts and Redraw Facilities

Offset Account: 

  • Deposit inheritance money into an offset account linked to your mortgage. This reduces interest while keeping the funds accessible.

Redraw Facility:

  • Make extra repayments on your mortgage while retaining the option to withdraw funds later if needed.

Example:

If your mortgage interest rate is 3%, but you could earn 6% by investing, it might make more sense to invest the funds instead of paying off the loan entirely.

On the other hand, if your mortgage interest rate is high, you may be better off placing your inheritance into an offset account. This allows you to save on interest and achieve a guaranteed return on your money without the risks associated with investing.

Inheriting Investments

If you’ve inherited shares, ETFs, or managed funds, these assets require careful evaluation. Deciding what to do with inherited investments depends on their performance and your goals.

Step 1: Assess the Investments

Understand What You’ve Inherited:

  • Individual shares may carry more risk but offer higher growth potential.
  • ETFs and managed funds provide diversification and steady returns.

Evaluate Performance:

  • Are the investments well-performing or aligned with your goals?
  • If not, consider selling and reallocating the funds.

Step 2: Understand Tax Implications

Capital Gains Tax:

  • Selling inherited shares or ETFs triggers CGT. The “cost base” for calculating CGT is their value at the time of inheritance.

Dividends and Distributions:

  • Any income generated by the investments is taxable as part of your annual income.

3. Decide What to Do:

  • Keep Them: Retain well-performing assets that align with your strategy.
  • Sell Them: Reallocate funds from underperforming investments.
  • Diversify: Use proceeds to build a balanced portfolio, such as a mix of shares, ETFs, and managed funds, that reduces risk. 

Don’t Do This

  • Sell investments immediately without understanding their value or tax implications.
  • Assume the portfolio fits your financial goals without reviewing its performance.

Common Mistakes

  • Selling investments without accounting for CGT.
  • Holding onto underperforming investments out of sentimentality.

Investing an Inheritance

If you’re wondering what is the best way to invest inheritance money, the answer depends on your financial goals, risk tolerance, and time horizon. Whether you’re planning for immediate needs or long-term growth, investing can help you make the most of your inheritance.

Popular Investment Options:

Here are some of the most effective ways to invest inheritance money in Australia:

1. Shares and ETFs

Why Choose Them?

    • Shares offer potential for significant long-term growth, while ETFs (Exchange-Traded Funds) provide diversification by investing in a basket of shares.
    • These investments are ideal if you’re comfortable with moderate risk and aiming for returns that outpace inflation.

What to Watch Out For:

    • Share values can fluctuate, so these investments are better suited for long-term goals.

2. Managed Funds

Why Choose Them?

    • Professionally managed funds simplify investing by spreading your money across various asset classes, such as shares, bonds, and property.
    • They’re great for beginners or those who prefer a hands-off approach.

What to Watch Out For:

    • Be aware of management fees, as these can eat into your returns.

3. Superannuation Contributions

Why Choose Them?

    • Boosting your superannuation allows you to grow your retirement savings with tax advantages, particularly if you’re eligible for concessional or non-concessional contributions.

What to Watch Out For:

  • Super is a long-term strategy since you can’t access the funds until retirement age.

4. Property Investment

Why Choose Them?

  • Buying residential or commercial property can provide rental income and long-term capital growth. It’s particularly appealing if you’re interested in building a passive income stream.

What to Watch Out For:

  • Factor in ongoing costs like maintenance, property management fees, and taxes.

Before you Start Investing

Take these important steps to ensure your inheritance investment decisions are well-informed:

Understand Tax Implications

  • Investments like shares and property can trigger tax obligations, such as CGT or income tax on dividends. Consult a tax accountant to understand your liabilities.

Plan for Immediate and Long-Term Needs

  • Don’t tie up all your inheritance in long-term investments. Keep a portion liquid for emergencies or short-term goals.

Align with Your Goals

  • Are you saving for retirement, growing wealth, or generating passive income? Your goals will determine the right mix of investments.

Balancing Risk and Reward

A balanced portfolio spreads your inheritance across different asset types to manage risk while targeting growth. Consider:

  • Low Risk: Cash, bonds, or term deposits.
  • Medium Risk: ETFs, managed funds, or diversified property portfolios.
  • High Risk: Individual shares or specialised property investments.

Common Mistakes to Avoid

1. Failing to Consult an Adviser

  • A financial adviser can tailor your investment strategy to your situation, helping you avoid costly mistakes.

2. Investing Without a Plan

  • Investing all your inheritance into one asset class, like property or shares, can expose you to unnecessary risk. Diversification is key.

3. Spending Impulsively

  • Avoid treating your inheritance as a windfall. Without a plan, it’s easy to overspend or make poor financial decisions.

Practical Example: How to Invest $100,000

Let’s say you inherit $100,000. Here’s a zoomed-out view of how you might allocate it. 

Be mindful that everyone’s financial situation is different, so use this example as a guide only and seek professional advice to clarify what would be best for you. 

  • $20,000 in a high-interest savings or offset account for emergencies.
  • $40,000 in ETFs or managed funds for long-term growth.
  • $30,000 toward superannuation contributions to boost retirement savings.
  • $10,000 for personal goals, such as home improvements or travel.

This approach balances short-term needs with long-term growth while keeping part of your inheritance accessible. 

The Takeaway

If you take away just one piece of advice, let it be this: talk to a financial advisor.

An inheritance is a significant financial and emotional event. Whether it’s money, property, or investments, the decisions you make now will have long-term impacts on your financial future. While it might be tempting to handle everything on your own, the complexities of tax implications, investment strategies, and financial planning are too important to leave to guesswork.

A financial advisor can provide you with clarity and confidence. They’ll help you navigate decisions like whether to pay off your mortgage or invest, how to manage capital gains tax, or how to build a balanced portfolio that grows your wealth. With their expertise, you can avoid common mistakes, maximise opportunities, and ensure your inheritance aligns with your goals.

Most importantly, a financial advisor removes the burden of going it alone. They’ll give you a clear plan, tailored to your situation, so you can focus on honouring your loved one’s legacy and building a secure future.

Don’t let uncertainty hold you back—reach out to a trusted financial advisor today. It’s the best step you can take to make the most of your inheritance.

Click here to learn more about our Investment Advice services.

Personalised Investment Advice for Your Financial Goals

In this video, Financial Adviser Erin Truscott shares how we help clients create tailored investment strategies that align with their unique financial goals.

Frequently Asked Questions

Have questions about managing your inheritance? You’re not alone. Deciding what to do with inherited money, property, or investments can feel complex. To help, we’ve answered some of the most common questions clients ask us, so you can approach your decisions with clarity and confidence.

1. What is the best thing to do with an inheritance?

The best thing to do depends on your financial goals. You could use the funds to pay off high-interest debt, invest for long-term growth, contribute to your superannuation, or build an emergency fund. It’s always wise to consult a financial adviser to create a tailored strategy.

2. Should I pay off my mortgage with my inheritance or invest it?

This depends on factors like your mortgage interest rate and investment goals. Paying off a mortgage provides financial security and saves interest, but investing could offer higher returns over time. Using an offset account or a redraw facility can balance both options.

3. How do I handle an inherited house?

You typically have three options: keep the house, rent it out, or sell it. Your decision will depend on your financial situation, the property’s condition, and your goals. Be mindful of costs like rates, insurance, and maintenance, as well as potential Capital Gains Tax (CGT) if you sell.

4. What are the tax implications of inheritance in Australia?

Cash inheritances are generally not taxed in Australia. However, income earned from investing the money (e.g., dividends or interest) is taxable. For property or investments, CGT may apply when you sell the asset. Consult a tax accountant to understand your obligations.

5. What is the best way to invest inheritance money?

The best investment depends on your goals and risk tolerance. Popular options include:

  • Shares or ETFs for long-term growth.
  • Managed funds for diversification.
  • Superannuation contributions to boost retirement savings.
  • Property investments for rental income and capital growth.

6. Can I invest inheritance money for retirement?

Yes, you can invest inheritance money into your superannuation, which offers tax benefits and grows over time. This is particularly beneficial if you’re close to retirement and eligible for concessional or non-concessional contributions.

7. What should I do with inherited investments like shares or ETFs?

Start by assessing their performance and alignment with your financial goals. You can choose to keep, sell, or diversify the investments. Be aware of Capital Gains Tax (CGT) if you sell and consider consulting a financial adviser for guidance.

Read More
What to Do with an Inheritance A Practical Guide ​

Inheriting money, property, or investments can be life-changing. While it provides opportunities for financial growth, it can also feel overwhelming if you’re unsure of what steps to take. Whether you’re wondering what to do with an inherited house, how to invest inheritance money, or how to handle debts, this guide will provide practical, detailed advice to help you make confident decisions.

Read More »
December 5, 2024

This is a publication of Direct Wealth Pty Ltd, a wholly owned subsidiary of Direct Wealth Group Pty Ltd.

General Advice Warning – The information contained in this article is of a general nature and does not take into account your particular objectives, financial situation or needs. You should therefore consider the appropriateness of the advice for your situation before acting on it. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decisions regarding any products or strategies mentioned in this publication.

Disclaimer – While all care has been taken in the preparation of this blog, to the maximum extent permitted by law, no warranty is given in respect of the information provided and accordingly, neither Direct Wealth nor its related bodies corporate, employees or agents shall be liable for any loss suffered arising from reliance on this information.

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