Transferring wealth to the next generation – what to consider

The ‘baby-boomer wealth transfer’ is predicted to be the largest in history, with US$4trn expected to pass to inheritors, or be left to good causes, within a generation[1]. So it’s surprising that not many people are putting plans in place to ensure their wishes are met, or preparing their beneficiaries adequately. 

The stats are worrying:

• Only 26% of high net worth (HNW) respondents in a recent survey[2] said they had a full strategy for transferring their wealth to the next generation
• Only 35% of HNW inheritors say they have been prepared by their benefactors[3].

Intergenerational planning extends far beyond inheritance tax planning. Our Wealth Planning Director, Sharon Thorpe, explores how to make sure your money is passed down as you wish, and that those inheriting it are ready for the responsibility.

Important questions to ask before leaving a legacy

People who have worked hard to build their wealth don’t want it frittered away after they die so it’s important to ask yourself some key questions:

1. How much money will I need until I die – including provision for later life care?
2. What am I likely to leave? Including cash, savings, investments, properties, vehicles, businesses you own, art and jewellery.
3. Who/what do I want to provide for?
4. Is there anyone I want to leave out?
5. How much do I want each beneficiary to have?
6. Do I want to restrict how my legacy is used?
7. Do I want to gift during my lifetime?
8. How can I ensure my wealth is cascaded to future generations as I wish?

The professionals supporting you, such as your solicitor and financial planner, should work together to make sure your Will is up to date, your arrangements are set up correctly and your instructions are clear.

This might involve setting up trust structures. These can help the person passing on money (the settlor) to maintain control, by dictating who will benefit from the trust, when and by how much. Setting up trust structures can also be useful for inheritance tax planning in the UK (see case study below).

There are other options if a beneficiary wishes their inheritance to skip a generation. e.g. by a Deed of Variation.

You may need to consider highly sensitive situations, such as how to protect your family in the event of a family fall-out or divorce. Sadly, this does happen, so it’s important to consider whether you wish to by-pass your son-in-law or daughter-in-law, for example, but ensure funds are available for your children and grandchildren.

How to prepare children to inherit your wealth

Famously, Bill Gates has said his children will inherit US$10m each – relatively small change compared to his multi-billion-dollar fortune, which will be donated to charitable causes. He and his wife, Melinda want their three children to be comfortable, but not enough to make them lazy!

The idea of parents protecting their children from too much wealth is becoming more common. Parents want their children to understand the value of wealth, how it was acquired and how to use it wisely. Without proper planning, the inheritance you pass on could dissolve rather than providing your children and grandchildren with a solid financial future.

Top tips to ensure your children use your wealth wisely

1. Make wealth a family discussion – if your heirs understand how hard you worked for your money, and the motivation behind your investments, they will be more likely to see the value of managing that wealth properly.
2. Share your experiences and educate your children about wealth – start sooner rather than later to develop their understanding.
3. Involve them in meetings with your trusted advisers – many people aged 30 - 60 do not have a financial adviser; including those who expect to inherit large sums.

Perhaps you believe your own parents have considerable wealth, but they’ve never discussed it with you. Try to ascertain whether they are already receiving financial advice or whether they could benefit from a meeting with a financial planner.

There are many considerations around intergenerational wealth planning – but there are also solutions. At Canaccord Genuity Wealth Management, we work closely with our clients and their families to ensure their legacy wishes are met.

UK case study - a successful family wealth transfer strategy

Mrs K had no children and wanted her brother to benefit from her estate. Her brother was also reasonably wealthy and planned to leave everything to his children.

Mrs K realised this could mean paying double inheritance tax – once as she passed her wealth to her brother and again as he passed it down to his children and they paid IHT on his full estate (including her wealth).

We set up a trust, with her brother as a trustee, so he could decide how and when to distribute (or hold back) the money.

Speak to an inheritance tax expert

If you would like to know more about passing wealth to your family tax efficiently, book a free consultation with an inheritance tax expert.

If you found this interesting, you might also want to read:

• Your guide to inheritance tax - calculate your potential IHT bill in five minutes
• How to boost your pension by making use of unused tax allowances
• Are you putting too much into your pension and risk being (tax) penalised?
• Post COVID-19 Wealth Planning Guides
• How can tax planning ensure you make best use of your pension annual allowance?
• Comprehensive wealth planning

The tax treatment of all investments depends upon individual circumstances and the levels and bases of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.

The tax treatments set out in this communication are based on our current understanding of UK legislation. It is a broad summary and cannot cover every circumstance and it does not constitute advice.