Welcome to the Friends with Money podcast, brought to you by Money Magazine, creating financial freedom for Australians since nineteen ninety nine.

Hello and thanks for joining us for another episode of Friends with Money, money Magazine's podcast to help you earn, save, and achieve your financial goals.

My name is Tom Watson, a senior journalist here at Money Magazine, and as always, it is a pleasure to be with you.

As we've discussed before on the podcast, Australia is in the midst of a colossal wealth transfer, where trillions of dollars are expected to pass from older to younger generations in the coming decades.

Some of that will come to the formal gifts, but most of it will come from inheritances, and you know these will obviously differ from family to family.

But in report on the subject, the Productivity Commission noted that in twenty eighteen twenty nineteen, the average inheritance was one hundred and twenty five thousand dollars and I assume it's a probably ticked up since then, so as anyone who has gone through it before.

We'll probably attest to inheritances and the inheritance process isn't always straightforward.

There are emotions and relationships navigate, and of course there are financial decisions to be made.

So on today's show we are going to look at some of the hidden cost to inheritances and some of the things that may be worth knowing before going through the process.

And joining us today on the show to lend her experteins on the subject is Melody Edwards, a senior financial advisor at Alesco.

Melody, welcome to Friends of Money.

It's saying a pleasure to have you on the show.

Thanks Tom, I'm very very excited to be here.

Oh, it's lovely to have you on.

We're excited as well, Melody.

To start off, how common is it for people to come to you looking for help around inheritances and is it usually I guess the people or person passing on the inheritance or is it those receiving it.

It's usually a trigger point for people to come in and get advice, a bit of a moment to spur action.

We find that it's becoming more and more frequent, as you know, in line with what the research is showing with that intergenerational wealth transfer is well underway.

But we find it's typically the person who is receiving the inheritance that comes in for that advice.

We have sort of taken a stance with our existing clients to have that conversation earlier about starting to think about what they want to do and how they want to pass on their legacy for their beneficiaries, and opening up that conversation to get the discussion going much sooner than you know at the point of death.

I imagine, like all things, a bit of preparation forward planning is pretty helpful, especially when it comes to something like their stand is.

It Yes, that's right.

Yeah, I know that you know they're inextrictably linked.

But before we really get into the financial side of things, I'd like to get your thoughts on the emotional side as well.

Obviously, if someone has received an inheritance, it can be because a loved one has died, which means that emotions may be pretty raw.

So in your experienced melody, how can people's emotions, I guess, shape their financial decision making around inheritances And what's some of the mistakes that you see people make in that respect.

So there are a myriad of emotions that come bundled with an inheritance and we you know see grief obviously is a huge one that plays into it understandably, but also things like guilt, relief, anger sometimes can can it be attached to it as well.

So there's no obviously right or wrong emotion, but just understanding and acknowledging that you know, it's it is a there is that emotional baggage that that is linked to put the framework around how we approach this inheritance.

It's trying to honor someone's legacy and their wishes and the life that they lived.

So that's a really important part of talking about it and recognizing that it's not a straightforward logical exercise.

Yes, logic kind of goes out the door a little bit, doesn't it.

That's right, that's right.

And I think in the ways that it sort of manifests as well, is that where there is a heightened emotion around this money and money is laden with emotion in sort of the average best of times, when you're going through this highly emotional period, that there is an instinct that you might want to use this money in a way that the person who left it to you would want, and that doesn't sometimes align with your own goals and your priorities.

So I think really recognizing how that interacts and acknowledging that there may be a conflict and reconciling that conflict in sort of internally helps you to take a step back and distance yourself from from the and the financial side of you know, what to do with the inheritance.

I want to kind of pick up on this point a little bit more in a second, especially along the lines of kind of you know, matching up with someone's legacy.

But in additional to the emotional side of things, there's obviously the issue of relationships and family dynamics that can obviously come out during these times.

And in this respect, I can imagine it's not uncommon for things to get a little bit messy.

So again, Melody, in your experience, is there anything that people can do ten best managed relationships during this inheritance process.

Yeah.

Money does tend to bring out the best and worst in people and in relationships as well, and it can also amplify issues that might have been simmering under the surface during someone's lifetime.

And we you know, unfortunately we have seen the negative impact of that and the breakdown of family relationships when going through an inheritance.

Process where possible.

We always advocate having open communication with everyone involved.

The more that we have create a safe space to have those open discussions without judgment and with an open mind to hear everyone side.

I think if everyone sort of has that frame of mind, it does make the process a lot less stressful.

You are likely to come to a compromise that works for you know, it works for everybody, and you know, be able to keep and maintain those relationships and not let it be destroyed in the process.

Ideally, Yeah, having the conversation earlier with the person before they pass away is really would be very beneficial to be able to, you know, have it directly from the horse's mouth, so to speak.

You know the intentions and what they would like, what their values are, what you know what they envis for the beneficiaries, rather than leaving it up to you guesswork and you know, someone having a different perspective because of a particular conversation and yeah, so you know where that's not possible.

Having a third party to be able to, like I said, create that safe space to engage in those conversations will help to overcome some of those potentially contentious issues or perspectives.

Yeah, I think those are both really important points, but both about the emotional side of things, but then about the relationship side as well.

I will say that the audits are probably really interested in getting into the practical side of our things now their melody, especially from the financial point of view.

So how should people approach managing and inheritance that they've just received?

You know, what are some of the I guess the first things they might want to think about doing?

Yeah, so the so usually an inheritance comes with a lot of emotions attached, so we advocate that people take momentus to pause and really think about what is important to them and their priorities before making any big decisions.

It's also an opportunity for a financial plan reset or setting up a financial plan if they haven't actually done that previously, with that focus on those goals and priorities for what they want to achieve.

And because an inheritance can involve more money than a person has ever received or managed before, it does potentially open up a lot of possibilities that they hadn't previously considered as being achievable, And so that's pretty exciting.

To be able to put a new lens on their plan.

From a financial perspective, I would say identifying all the types of assets and how these can actually be inherited, because I think the perception is everything has to be sold to cash and then they just get a long sum of money in the bank.

But that's not always the case.

Then that might not necessarily be the best option for that particular fishery, and each beneficiary can potentially have a different position on that or particular wish around which assets to inherit if they have the ability to choose.

So, really getting a good understanding of what does it look like currently in the estate and what is it that each beneficiary is entitled to and how does that look and feel.

Tax is a big part of it as well, depending on the type of asset.

So really understanding, okay, what are the tax implications for this particular asset and how does that translate when it actually transfers to me.

So getting a good understanding in the working with your accountant and advisor will help build that and that picture to give you the most complete picture as possible.

And I'm going to do a shameless plant here and say that if anyone's interested in learning a little bit more about the subject of our inheritance syntax.

It can go back to episode one ninety with Mark Chapman where we get into the implications of our inherited property shares, cash stoop and more.

So go give that a listen if you are, if you're interested, So, Melodie, I'd love to kind of break down this next part of our chat into I guess how people might want to approach using inheritance from a short term and a longer term perspective.

So on the former, you know, what are some of the ways that people can put an inheritance to use over the short term that you know matches up with their own financial goals, but you know also perhaps with the wishes of a loved one that they actually receive the inheritance from.

Yeah, so paying off personal debt or non deductible debt is usually a good idea.

These are things like personal loans, credit cards, car loans, or home loans, which essentially is debt that is not tax deductible to you, so it costume more to have.

Paying off these loans will help free up the future cash flow to be able to contribute towards more, you know, wealth creation, opportunities or meet other lifestyle goals.

So that's really one that is common we see for a short term goal.

Another is gifts, which are you know, to loved ones or you know, children or grandchildren of the ones who have passed away.

That can be something about honoring the legacy again of the person who has passed away and that relationship that they shared with with that loved one.

So that's another way of honoring and being able to give an early inheritance to some people as well who you may not have been able to help financially previously.

I think the challenge also lies though, where there's not enough funds and there's you know, a lot of competing goals.

So for an example, that might be the bulk of the asset is actually the childhood home and there's not enough money to actually fix up or maintain this asset.

You know what that means is if you hold the asset, you're actually compromising on other goals for yourself, like travel or when you can retire, or how much you can live on.

And so I think that's it's not necessarily that means that the rest of your goals are unimportant, but it's a way of acknowledging that if this is important to you, then you have to know what's going to give on the other side of it.

And if you know the other goals, you know, if you're honest with yourself and say that, yeah, those are actually my top priorities and I still have this sentimental attachment to the home.

You can do that in other ways as well, So creating a memento around, for example, having a photoshoot in that in you know, the home as a physical memento to capture those memories.

Are being able to use some of the proceeds of that asset to donate to a cause that was very important to the loved one who passed away, or even a memorial bench in the neighborhood to be able to go back and you know, take that moment to remember them.

So these are all different ways that you can you know, thinking outside the box around how you can separate the asset and the sentimental value and really have the whole picture to work with when you're thinking about your own plan.

I really like that and that some lovely ideas because I imagine that it is very difficult for people to kind of, I guess, approach the idea of selling a home or an asset like a home which has been a family home.

I can imagine that's quite tough, Malode.

You're thinking more, I guess of the long term.

Now, how can people make use of inheritance to I guess better themselves and their family financially own for the long run.

Yeah.

So no, no matter how you know how much you get, or what that size of that inheritance looks like, or what you're actually trying to achieve and what your priorities are, I think it's always we always advocate for mindful and deliberate decision making because there's no right.

Everyone's different, everyone has a different circumstance and a different goal to achieve.

So it's very easy though, to, especially when you do have a large inheritance or a windfall like that, to spend it mindlessly because it's you know, suddenly you've got more money than you have you know, managed previously or received previously.

You know, and the research does support that, you know that a large portion of most inheritance do get spent in the in the first four years of receiving it.

So wow, which can be Yeah, you know a bit of a missed opportunity to set yourself up for you know, future well financial wellbeing.

So what this looks like when we're talking about mindful and deliberate you know decision making is, you know, to put it quite simply, gives some, invest some and spend some and you know how you break that down will vary again person to person, and this is where a detailing, a detailed plan is where you can really incorporate all those goals and priorities and having visibility around what the impacts of those decisions will make on all those different goals and priorities.

So that really clarifies what the value, what you value, and how to best achieve that.

It also helps reduce the impact of those feelings of regret of you know, potentially you know, wasting the opportunity or spending things on something that didn't actually really really mean that much to you.

So you know, that's a good starting point.

People also tend to have a bias towards the present moment and not towards you know, future the future value of of course of benefits yep.

So investing you know, the proceeds is not necessarily the first instinct that people and it typically does sit down law on that priority priority list.

So it's important to bring that to the forefront and use your goals to frame that.

What I think is a handy way to think about it is what is it that I need in the next one to three years, what is it that I want to do and try to achieve, and then break it down the next three to seven year and then seven years and beyond, and so that helps give the framework to figure out what is it that I actually need from a financial perspective to support those goals.

So I think helping it break down into stages is a really good way to order and help segment what you're trying to achieve if the whole big plan seems too much to tackle at once.

I love that way of kind of simplifying it, as you said, breaking it down Melody.

I think that makes the heap of sense personally, is we've covered so much ground today, while you've covered so much ground today, it's all on you, not on me.

But before we let you go, do you have I guess, any tamps or perhaps even a single tamp on the topic of inheritance that you'd like to leave listeners with.

Absolutely.

I think speaking about money and inheritance is still a little bit taboo, and it is a bit of an uncomfortable conversation, or it can be an uncomfortable conversation that people tend to avoid rather than being inspired to talk about.

But I think I would encourage those conversations early and often to help clear up those misunderstandings.

Share your intentions and your values with your loved ones to prevent those issues becoming bigger upon your death.

But if you're not ready for those conversations with family yet, then find a trusted professional who you can start having those conversations with, because the more that it gets spoken and talked about, I think people will become you know, will all be benefiting from that as the event happens, after the event happens.

But also from a practical sense, I think if you're the receiving end of inheritance that involves shareholdings, absolutely getting the cost spased as soon as you can, your future self will thank you with the tax consideration.

So that's one of the biggest mindfields to wade through when you're receiving our shareholdings.

A great point to leave on and we love breaking down financial poos on friends with money and having financial conversations.

As as our listeners know full well, Melodie, this has been a fantastic subject to get into.

Thank you so much for helping us wade through it and for joining us today.

I'm Friends with Money.

It's been a pleasure having you on.

Thank you very much.

That's it for this episode of Friends with Money.

But I forget to jump on our website moneymag dot com dot Au for your daily dose of financial news, or you can go grab yourself a copy of the latest edition of Money Magazine in all good newsagents.

As always, Friends of Money will be right back in your podcast fees next week, so until then, my name is Tom Watson.

Goodbye for now.

Thanks for listening to the Friends with Money podcast.

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