The True Cost of an Inheritance: What You Need to Know

One of the biggest misconceptions about the true cost of an inheritance is that New Zealand has an inheritance tax. It doesn’t. Unlike some other countries, there is no government-imposed tax on the money or assets you receive from an estate. However, that doesn’t mean there aren’t costs involved.

People often believe they need to distribute their wealth before passing to avoid tax, but this isn’t necessary in New Zealand. Gifting money to children or beneficiaries early can be a strategic move, but it should be done with careful financial planning rather than fear of non-existent tax penalties.

A “cold inheritance” is the traditional concept—receiving assets after a loved one has passed. However, many people now prefer a “warm inheritance,” where they strategically distribute wealth while they are still alive. This approach allows parents to see the impact of their financial support, such as helping children pay off mortgages or fund education, rather than waiting until later in life when their children are financially secure.

Even though New Zealand doesn’t impose inheritance tax, there are still costs to consider:

1. Legal and Administrative Fees – Probate costs, lawyer fees, and estate administration can be expensive. Opting for an online will service might seem like a cost-effective solution, but some providers take a percentage of the estate, which can significantly reduce the amount left to beneficiaries.
2. Family Disputes – One of the most common and costly issues surrounding inheritance is conflict between family members. Disagreements over the division of assets can lead to long, expensive legal battles that can tear families apart.
3. Power of Attorney Risks – When one child is given power of attorney, tensions can arise if other siblings feel they are being excluded or financially disadvantaged. Ensuring transparency in estate planning can help mitigate these risks.
4. Inheritance from Overseas – If you are receiving an inheritance from another country, you may be subject to that country’s tax laws. For example, in the UK, estates over £325,000 are taxed at 40%, while in the U.S., the exemption threshold is significantly higher, at around $27 million for couples.

If you expect to inherit wealth or want to ensure your own estate is managed smoothly, here are some key steps:

• Ensure you have a valid will – Without a will, your estate may go through probate, which can take years and cause significant delays.
• Discuss your estate plan with family – Open conversations can prevent disputes and ensure everyone understands your wishes.
• Seek financial advice – Whether you’re planning your own estate or receiving an inheritance, consulting with a financial advisor can help you make the most of the opportunity while avoiding common pitfalls.

If you receive a lump sum, making smart financial decisions is crucial. Instead of rushing to spend it, consider:

1. Paying off high-interest debt – Clearing personal loans or credit card balances can improve your financial stability.
2. Reducing your mortgage – Using inheritance money to pay down your mortgage can save thousands in interest over time.
3. Investing for the future – Whether it’s shares, property, or retirement funds, investing can help grow your wealth long-term.
4. Estate planning for your own future – Use the inheritance as an opportunity to put your own financial affairs in order, including creating or updating your will.

• New Zealand does not have an inheritance tax, but there are still legal and administrative costs involved.
• Family disputes are one of the biggest risks to inheritance—having open conversations and a clear will can help prevent issues.
• A “warm inheritance” (gifting wealth while alive) can often be more beneficial than a traditional “cold inheritance.”
• If you’re inheriting money from overseas, be aware of potential tax implications from the country of origin.
• Strategic financial planning is essential to making the most of an inheritance, whether that means paying off debt, investing, or estate planning for the future.

Receiving an inheritance is a significant financial event, and making the right decisions early can have long-term benefits.

If you’re unsure what to do, Lighthouse Financial Wealth offers personalised financial planning to help you navigate your options and secure your financial future. Get in touch with us today to discuss how to maximise the true value of an inheritance.

Want to learn more? Check out these other episodes of Cheques And Balances