Intergenerational Wealth Planning – Your Options to Pass on Wealth to the Next Generation

Passing on wealth from one generation to the next is a timeless endeavour that requires careful consideration and strategic planning. Intergenerational wealth planning involves the thoughtful arrangement of assets, investments, and financial strategies to ensure that your family’s financial legacy endures for generations to come. In this article, we explore some of the main options available for intergenerational wealth planning, the benefits of creating a plan and some of the most important considerations when doing so.

Foundations of Intergenerational Wealth Planning

Before delving into the specific strategies, it’s crucial to understand the foundations of intergenerational wealth planning. This includes assessing your current financial situation, defining your goals for wealth transfer, and understanding the legal and tax implications that can affect your planning decisions.

Gifting Assets

Strategic gifting can play a pivotal role in wealth transfer. By gifting assets during your lifetime, you can not only witness the impact of your generosity but also potentially reduce your taxable estate and provide immediate support to your family, aiding them in overcoming current challenges. There are a number of important annual gift tax exclusions that enable you to gift a certain amount to each recipient without incurring gift tax.

Recent data from the Institute for Fiscal Studies (IFS) highlights that over any two-year period, around 5% of adults receive a ‘substantial’ gift. Over an eight-year period, around 30% of individuals in their 20s and early 30s receive at least one wealth transfer, often to facilitate entry into the property market.

Beyond property assistance, there are numerous motivations for gifting assets, such as supporting education, daily expenses, or funding travel or holidays. However, before proceeding with substantial gifts, it’s wise to evaluate the potential impact on your lifestyle and future plans, including the intricate interplay between lifetime gifting and inheritance distribution.

Should your estate potentially be subject to Inheritance Tax (IHT), a strategic lifetime wealth transfer can help manage this liability. Nonetheless, not all gifts immediately fall outside of IHT rules. To optimise tax benefits, understanding options and seeking professional guidance is crucial.

Prior to gifting, a prudent step is to assess how it might influence your long-term financial goals and security. Could providing a deposit for your grandchild’s home compromise your later financial stability? Might a future financial shock leave you vulnerable due to the gift? Uncertainty in determining the appropriate gift amount is common across age groups, with concerns ranging from future care costs to retirement needs.

Engaging in thorough financial planning unveils potential implications, aiding you in making informed decisions that align with your legacy and beneficiaries’ welfare. By thoughtfully navigating the intricacies of lifetime wealth transfer, you can ensure both immediate assistance and enduring financial stability.

Using a Trust to Pass on Wealth

In straightforward terms, a trust is a legal arrangement designed to oversee and manage assets. In this arrangement, you would entrust assets to benefit a specific beneficiary. The responsibility of managing these assets on behalf of the beneficiary rests with a trustee. Interestingly, a trust can accommodate numerous beneficiaries or trustees, depending on your preferences.

Within a trust, you have the capacity to outline the designated uses for the assets held within it. This serves as a directive that the trustee is obligated to adhere to. For instance, you might stipulate that beneficiaries receive a regular income generated by the trust’s assets, yet are restricted from selling the assets themselves. Consequently, trusts become a valuable tool when you possess a distinct vision regarding how you intend for beneficiaries to harness the wealth.

Alternatively, you can grant the trustee the authority to exercise judgment in decision-making. For instance, if your objective is to set aside funds for a grandchild, you might appoint their parent as the trustee responsible for managing the assets until the child comes of age. During this interim, you could allow the parent to make withdrawals for purposes like covering educational expenses or participation in sports clubs.

Leaving Assets in Your Will

The conventional method of asset transfer is through a will, where you stipulate who will inherit your wealth after you die. According to the Resolution Foundation, inheritances are projected to double in value within the next two decades, underscoring the significance of this approach.

If you have concerns about gifting affecting your future financial security, leaving an inheritance could provide an alternative. However, it’s wise to contemplate how your estate’s value may evolve during your lifetime, potentially influencing your asset allocation strategy for beneficiaries and charitable causes.

Wills offer various distribution options, including designating specific assets for individuals, allocating a portion of your total estate to individuals, or evenly dividing your estate among multiple beneficiaries.

While you can write your will independently, legal and financial guidance can be invaluable, especially for intricate estates or wishes. Remember, the decisions you make today will shape the financial future of your beneficiaries for years to come.

Philanthropic Endeavours

For families with a strong charitable inclination, philanthropic strategies can be an integral part of intergenerational wealth planning. Establishing charitable foundations allows you to make a lasting impact on causes you care about while involving your family in a shared mission.

Potential Implication of Passing on Wealth

Transferring assets isn’t always straightforward due to potential tax considerations. In cases where the total value of your estate surpasses specified thresholds, your estate could be subject to Inheritance Tax (IHT). If you pass away within seven years of gifting assets, they might be factored into IHT calculations, while assets placed in trusts could be evaluated for up to 14 years.

Understanding the potential IHT impact on your estate is vital for reducing potential tax liabilities and maximising the legacy left to loved ones. Additionally, other taxes, like Income Tax, could come into play if your chosen method of asset transfer influences the recipient’s income.

Crafting an Effective Intergenerational Wealth Plan

Creating a comprehensive intergenerational wealth plan as a family could be an important first step. Drafting a will is paramount to specify your wishes, as ‘intestacy’ rules (where no will exists) could allocate your assets in a very different way than you would choose. Remarkably, a survey by Canada Life revealed that one-third of adults over 55 have yet to tackle this crucial task. There are many benefits to creating an intergeneration wealth plan as a family including:

• Facilitating money conversations. Collaborating with a financial planner alongside your family can help navigate money discussions that might otherwise be uncomfortable. These conversations provide insights into differing attitudes towards money within different generations.
• Understanding aspirations and challenges. Incorporating your family’s perspectives aids in comprehending their goals and obstacles. This knowledge shapes how you distribute wealth. Aligning your plan with their aspirations ensures your legacy suits not just you, but also those benefitting from it.
• Enhancing tax efficiency. Co-ordinated planning reveals opportunities for tax efficiency. Understanding and optimising allowances like ISAs, pension ‘Annual Allowance’, and ‘Dividend Allowance’ can reduce tax burdens and extend the impact of your wealth.
• Family involvement. Involving your family introduces them to financial planning’s long-term benefits. Tailored advice can enhance their financial well-being, encouraging informed decisions and prudent use of inherited wealth.

Remember, family involvement is adaptable; you control the extent of participation. Navigating different life stages and challenges across generations can be complex, but collaborating with a financial planner facilitates productive discussions and strategic wealth transfer.

Summary

Intergenerational wealth planning requires a combination of foresight, legal expertise, and financial acumen. It is important to consider options like estate planning, trusts, gifting strategies, leaving assets in your will and philanthropy. It’s also crucial to consider the benefits of creating a comprehensive intergenerational wealth plan. Every situation is unique with it’s own unique intricacies and complexities, so seeking advice from a financial planner and legal professionals is essential to tailor your plan to your family’s needs. By taking proactive steps today, you can pave the way for a wealthy financial future that spans generations.

If you would like to talk about any of the issues in this article or need more general help with your finances, please get in touch with us.

Share this article