If your clients want to retain their wealth, now’s the time to start planning as a family

parents and adult children sitting in the garden, laughing

How do your clients plan to pass on their wealth?

Barclays say that, in the UK, over 80% of household wealth is held by the over-45s. Over the next 30 years, this wealth – estimated to be around £5.5 billion – is set to be transferred between generations as inheritance or gifts.

Despite this, abrdn report that only a quarter (26%) of investors have a wealth transfer strategy in place.

Considering that the average age for inheriting from grandparents is 29, and the average age for inheriting from parents is 44, there is likely be a growing demand for financial advice from a younger generation inheriting from the “baby boomers”.

Intergenerational wealth planning can smooth the transfer of assets between generations and mitigate tax. Read on to find out why your clients – and their parents and children – can benefit from a joined-up approach.

“Giving while living” becoming more popular

In the past, your clients may have not given much thought to their estate plan. Many would have made a will to distribute assets on death while those with a family business may have made arrangements for succession.

These days, the idea of “giving while living” and transferring wealth earlier in life is becoming more popular. There are many reasons for this.

Firstly, distributing assets on death might mean that a client’s children or grandchildren are in their 50s or 60s by the time they receive this inheritance. At that stage of life, it may not be as useful to them as receiving assets in their 20s or 30s.

Creating a plan to transfer wealth to younger generations early in life can have a more beneficial impact on the recipient. They receive a gift at a time in life where it may help them to buy a home, start a business, or pay for further education.

Secondly, transferring wealth earlier means clients can see the positive benefit of their gift. They get to vicariously enjoy the fruits of their generosity through the impact on their loved ones.

Finally, and increasingly pertinently, gifting earlier in life can help to mitigate Inheritance Tax (IHT).

Under the IHT rules, gifts made more than seven years before death typically fall outside a client’s estate for tax purposes. These are “potentially exempt transfers” or PETs.

It follows that, if a client makes a substantial gift at the age of 55, they are much more likely to survive for seven years than if they made the same gift at 85. So, as well as the other positive outcomes of transferring wealth earlier, it can also potentially mitigate serious IHT issues.

A lack of financial education could make it tough for the younger generation

Passing wealth between generations can cause some issues if the whole family are not aligned when it comes to how the money might be used.

You’ll know from working with your clients that family relationships can be complex. Simply handing money to children before they are ready is fraught with potential dangers, and beneficiaries won’t always appreciate family wealth and their own inheritance. This can be frustrating for those gifting the wealth.

Additionally, a younger generation may have no idea what to do with any inheritance.

Research published by Money Marketing revealed that just 2 in 5 (41%) young adults are considered “financially literate”. Two-thirds (61%) of young adults do not recall receiving any financial education at school, compared to just under a third (29%) who do remember receiving such lessons.

Working with an expert can help smooth the transfer of wealth in several practical ways.

Firstly, creating an intergenerational plan that includes grandparents, parents, and children can help to foster a mutual understanding of each party’s financial goals, investment preferences, and risk tolerances.

These are likely to differ between the generations. For example, the older generation are more likely to have goals such as preserving wealth or passing wealth along to future generations. Beneficiaries, meanwhile, are much more likely to prioritise goals such as debt repayment, travel, and building a pension.

Younger people are also more likely to invest with sustainability or a wider societal benefit in mind, such as ESG (Environmental, Social, and Governance) investing.

Secondly, including all members of the family in the plan can help to manage expectations. Children often overestimate the inheritance that they expect to receive, so having open discussions about family wealth can ensure they are not disappointed when the transfer occurs.

Finally, as you read above, there can be significant tax benefits of planning early. Maximising the use of IHT exemptions, gifting, and trusts can help generations to pass along wealth without 40% of this ending up in the pockets of HMRC.

Get in touch

If you have clients with older parents or adult children and would benefit from joined-up financial planning that can benefit the whole family, please get in touch to find out how we can help.

Email or call 01454 416653.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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