INHERITANCES AS WE KNDOW THEM ARE BROKEN. THIS IS HOW WE FIX THEM

OPINION

Inheritances as we know them are broken. This is how we fix them

The Conversation By Owain Emslie and Danielle Wood

20 August 2019

An older couple hug as they admire a beach view

PHOTO: More than 80 per cent of money passed down from parents goes to people aged 50 and over. (Pexels)RELATED STORY: We’ve set a trap for millennials that none of us should be proud of

Inheritances can have an enormous impact on finances and lives.

Yet in Australia we know surprisingly little about who gets them and how big they are.

New Grattan Institute research provides some answers.

Inheritances are big and growing

A sample of estates from Victoria’s probate office suggests the median estate in Victoria is worth about $500,000. That’s likely to be close to what it is Australia-wide.

But many are much larger. About 20 per cent are worth more than $1 million, and 7 per cent are more than $2 million. Property is the largest component, accounting for about half of the average value.Our generational bargain is at breaking point
Older Australians are doing their best, supporting their children via the “Bank of Mum and Dad”, caring for grandchildren and scrimping through retirement. But it’s not enough.

The main beneficiaries of “final” estates (estates without a surviving spouse) are children, who receive about three-quarters of all inheritance money.

Other family members, such as nieces, nephews and grandchildren, receive about 20 per cent. Friends get about 4 per cent, and charities 2 per cent.

Average inheritances are growing by about 2 percentage points above inflation each year, which is a good deal faster than wages or gross domestic product.

There are good reasons to believe they will soon grow even faster.

Net wealth has grown strongly among older households. Households headed by people aged over 75 now have an average of $1 million in assets, up from $400,000 for a household headed by someone in the same age group in 1994.

And most retirees don’t draw down on their savings.

Indeed, many are net savers through much of their retirement, meaning there’s only one place their accumulated property and superannuation wealth can go: into bequests.

Inheritances are going to the already old…

These days, inheritances generally don’t arrive when people are saving for a house or trying to raise a young family.

More than 80 per cent of money passed down from parents goes to people aged 50 and over.

The most common age bracket in which people to receive an inheritance from parents is 55-59.

Inheritance money largely flows to people aged 50 or older

INFOGRAPHIC: Inheritance money largely flows to people aged 50 or older (Supplied: Grattan Institute)

It’s the result of good news — parents are living longer.

But as life expectancy grows still further, it will mean inheritances increasingly supplement retirement savings rather than help young people get into housing.

…and the already wealthy

The wealthiest 20 per cent of Australians get 38 per cent of inheritance money; the poorest 20 per cent get only 8 per cent.

It means the growing wealth of Baby Boomers is likely to end up concentrated in the hands of a select group relatively well-off Generation Xers and Millennials rather than being widely spread.

Wealthy people of all ages tend to get larger ineritances

INFOGRAPHIC: Wealthy people of all ages tend to get larger ineritances (Supplied: Grattan Institute)

It will reinforce the advantages already enjoyed by people with well-off parents, including better schooling, better connections and a greater ability to take financial risks because of a parental safety net.

If (as is possible) inheritances rather than lifetime earnings end up becoming the dominant route to wealth in Australia, there will be less incentive for ordinary Australians to attempt to get ahead through individual endeavour.

We will have entered what French economist Thomas Piketty calls a “Jane Austen world”.

We don’t tax inheritances…

Calm debate on policy setting around inheritances is hard to come by in Australia.

Inheritances and gifts have been tax-free since the 1970s.

Australia is one of only seven OECD countries without any inheritance, estate or gift taxes. Despite their economic worth, there seems to be little appetite to bring them back.

…if anything, we subsidise them

Not taxing inheritances is one thing, but actively subsidising them is another.

Superannuation tax breaks were intended to encourage people to save for their retirement and to take pressure off the age pension system.

But given that many retired Australians do not draw down on their capital, the super tax concessions boost the size of bequests.Combining two certainties of life
Inheritance taxes make very good economic and social policy sense, but combining the two certainties of life — death and taxes — remains deeply unpopular, writes Michael Janda.

Super death benefits tax is intended to claw back superannuation tax breaks when the money is passed on, in order to ensure that the Government doesn’t subsidise inheritances.

But, at 15 per cent, the rate is too low to capture the value of the accumulated tax breaks. And it can easily be avoided by retirees withdrawing funds tax-free and then contributing them back as a post-tax contribution, which is tax-free when passed on.

The special treatment of the family home in the age pension means test also acts to boost inheritances at taxpayers’ expense. Without it, there would be less to pass on.

It’s time to claw some of them back

There is little justification for taxpayers subsidising inheritances. Policy changes could help.Grand Designs: revenge porn for millennialsI should hate a show about wealthy Baby Boomers building their dream homes, but I can’t get enough, writes Jack Gow.

We recommend a higher tax on super bequests paid to non-dependents to better capture the value of the super tax breaks that are passed on rather than used for retirement. The cap on post-tax super contributions should also be lowered, to limit the re-contribution strategies.

The age pension assets test should include part of the value of the family home, perhaps the part above $500,000. Seniors with higher value properties should be allowed to borrow against their home using the Pension Loans Scheme.

This would give them the ability to stay in their home but would mean that some of the wealth that would otherwise be passed to heirs (most likely in their 50s) would instead be used to fund them, taking pressure off the pension.

Owain Emslie is an associate and Danielle Wood is Program Director, Budget Policy and Institutional Reform at the Grattan Institute. This article originally appeared on The Conversation.