Keeping it in the family
One of the main reasons cited for not sharing financial information with children is that “it’s none of their business”. However, with the majority of us planning to leave an inheritance behind for our children, it might be wise to face up to the fact that it will one day become their business. Without a good understanding of the financial estate, things can become harder than they need to at an otherwise difficult time.
Bringing family members into the financial planning process earlier has its benefits as well. Involvement means that people are likely to be more prepared to look after any inheritance they receive. Younger generations may not yet have much experience of financial planning and investing, so benefitting from your experience may make them less inclined to make poor, rash, decisions as they have a better understanding of the financial plan.
This understanding also extends to an appreciation of the older generation’s wishes, and can help you pass on a legacy, rather than just money. It should also mean that there are fewer surprises in store which in the worst cases could lead to family arguments, contested wills and unnecessary costs. On top of that, improved awareness of plans can also be helpful if a Power of Attorney needs to be used in the future.
The kids aren’t alright
There are also other larger trends that can make it a good idea for families to discuss longer-term financial planning as a unit. Firstly, younger generations are struggling, and while they’re not “owed” anything, it’s natural for parents to want to help. Many a millennial will argue that university debt and sky high property prices are making things financially harder for them than it was for their parents and grandparents.
Of course there’s more to it than that, and things weren’t exactly easy “back in my day” either! However, data published earlier this year shows that millennials are the first generation of workers to be financially worse off than their parents in more than 100 years. The positive income trend that we’ve experienced since the 1800s is going into reverse, and whilst young people’s wealth is declining; pensioners’ disposable income has tripled. This new division of wealth means it’s more important than ever to bring multiple generations into the planning process in order to improve the overall financial position of the whole family.
Planning for the future: a family affair
A growing number of estates are now facing inheritance tax (IHT), with IHT bills rising across the country. Having a more joined-up approach to financial planning can open the door to strategies that may help to reduce the amount of IHT payable, allowing the money you’ve worked hard for to stay in the family and cascade down through the generations.
Let’s look at an example:
- Sheila is 65 years old
- Her estate is worth £1 million
- half of that is her home and the rest is savings and investments
- She has three grandchildren (triplets!) who are eight years old
After speaking to her financial planner, Sheila realises that she can comfortably afford to start gifting some of her wealth to her loved ones. She decides that she will invest £50,000 into trusts for each of her grandchildren. These gifts will then be exempt from IHT, as long as Sheila lives for another seven years. By giving this money to her heirs now, Sheila effectively saves £60,000 in inheritance tax.
Furthermore, compound interest means that (based on a 3% real rate of return) Sheila’s grandchildren could have a pot worth £67,195 by the time they turn 18. They could then use that money for university; relieving them of the burden of student debt, which could help save more effectively for their futures when they start earning for themselves.
Sheila is just an illustrative example, and depending on future circumstances, her legacy could be more or less than indicated here. However, a lot of people do end up paying more IHT than they need to, due to a lack of planning or things just not being set up in the right way. If this is something you’re worried about then I’d urge you to speak to your financial planner. And why not bring someone else along to meet them as well? In our experience, families that plan ahead together are the families that reap the reward.
A living legacy
As illustrated by Sheila above, it’ possible to create a ‘living legacy’ by gifting some of your wealth now. This means that not only do you get to see the difference your money makes, but you’re also able to help your loved ones earlier in their lives, when they perhaps need it more. Your influence could even make them spend it more wisely!
I’ve come across many clients who would love to share wealth with their offspring sooner rather than later, but are worried about how much they can afford to give away. It’s often regarded as easier to leave assets behind in your Will because you know you won’t need them anymore, even though it’s probably less tax-efficient. A good financial plan can help give you the confidence you need to take action earlier and prevent IHT eating into your beneficiaries’ inheritance.
It starts with looking at all your assets, what you want to do, and how much you might need in later life. We can then do ‘cashflow modelling’ to analyse your arrangements, forecast your future income needs and look at whether you’re likely to achieve your goals. We can also test different scenarios, such as if you were to give a substantial sum to your children, and see what impact that has on your financial plan; helping you to make informed decisions.
Book a meeting
If you’re considering the benefits of financial planning (for you, or the whole family!) then please get in touch. You can have a no-obligation discussion with one of our expert financial planners to go over your needs and find out how we can help. Just use our online form to request a callback.
Or if you have any specific questions about what I’ve covered in this blog, you can leave a question for me in the comments below.
This blog should not be regarded as financial advice. Laws and tax rules may change in the future and your tax treatment is based on your individual circumstances. The information here is based on our understanding in October 2017. Investments can go down as well as up in value and you may get back less than you pay in.