Australia is facing a tidal wave of wealth transfer through inheritance and it is vital to think about estate planning as you move towards retirement.

In the years to 2050, lots of lucky Australians are in line for $4.9 trillion in inheritances. That amounts to $224 billion annually, according to research from investment and insurance group Generation Life.

If you will be part of that wealth transfer for a large or small amount you need to develop a plan, something many people don’t do.

“Our report shows that while 67 per cent of Australians feel confident that they are going to leave an inheritance, only 14 per cent have a plan in place,” Generation Life executive director Felipe Araujo said.

“For those over 50 only 23 per cent have a plan.”

A plan doesn’t have to be complex. It begins with an assessment of your financial situation and the needs of your dependents, family and others to whom you want to make a bequest.

“You need to think ‘If I died yesterday, how much am I worth in a dollar amount and what do I want to do with it?'” said Thabojan Rasiah, principal of Rasiah Private.

Don’t forget to include all your assets like property, superannuation, shares, bank accounts, businesses and household assets in the calculation.

That train of thought will lead to considering who you want to leave your estate to, why, and how will that affect them, Rasiah says.

For adults with capacity, dealing with an inheritance can be relatively straight forward, but making arrangements for those with disabilities can be complex.

“For those with disabilities, an inheritance can affect their government benefits or their NDIS entitlements. Think about how long will they need the money for and do they need an amount of money or an income stream?” Rasiah said.

Leaving an income stream to someone with disability or to children prior to the age of maturity can be complicated.

It can be done using trusts set up via your estates or through various state trustee bodies, but that can be expensive to set up and maintain.

Another option is to use investment bonds sold by financial groups.

Araujo says Generation Life has an investment bond product that can include restrictions on how much a bond can pay out.

“For example, a bond might be restricted to pay out up to 10 per cent of its value every year,” Araujo said.

A will or super?

Pretty much everyone needs a will and a pro forma will can be obtained at the post office. There is also the option of using a lawyer.

But those with superannuation should decide whether they want to direct their super into their estate when they die or use a non-lapsing binding death nomination to direct their super to heirs as they choose.

If your super is paid directly through heirs rather than going through an estate there can be advantages. But remember tax advantages only apply to children under 18, financial dependents and spouses who are not taxed.

All other recipients will face a tax bill of 17 per cent on any super that has been made through concessional contributions like those employers make through the superannuation guarantee.

All super money paid out of your estate to non-dependents will be taxed at 15 per cent because the Medicare levy is not payable.

Paying super direct to heirs after death has an advantage. Your decision cannot be challenged by aggrieved relatives and will finish up where you want it to go, with estate challenges often successful.

Dodging the tax man

If you want to deliver all super to family or heirs without tax there are a couple of things you can do.

The simple way is to take some money out of super and pay it to whoever you like before you die.

Once you are over 65, or have reached preservation age, you can make withdrawals tax free.

“A good reason to do that is that you want to be around to give money to your kids and help them out when they actually need it,” Rasiah said.

“You don’t want to give it to them when you’re 90 and they’re 70.

But that involves the obvious risk that you could leave yourself short.

“Make sure you’ve done your financial plan and you know you’ve got enough,” Rasiah said.

The other thing to think about is that one in three marriages finish in divorce, so if you give an inheritance to a child early a significant proportion might finish up with an ex-partner.

However, remember none of us know when we are going to die so err on the side of caution.

If you want to get fancy, there is the strategy called re-contribution. That means you withdraw any money in your fund that is classed as concessional as a lump sum once you are of an age to do it tax free.

Then you pay it back in as a non-concessional contribution which will not be taxed in the hands of any beneficiaries receiving it directly from your fund or from your estate.

“There is more opportunity to do this in recent times because the government has changed the rules to allow people to put money into super up to the age of 75,” Rasiah said.

If you use that strategy, make sure you get good advice because it takes work and mistakes could cost you dearly.

Don’t leave your inheritance plans to a day that may never come.

Act now and seek advice if you can afford it because otherwise your heirs may pay an unnecessary price.

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