Most financial plans will thoroughly consider inheritance tax – in other words how best to prepare your wealth for your children. What many plans overlook, however, is intergenerational planning – or essentially, how to prepare your children for your wealth.
Inheritance tax planning is, in many ways, dull and soulless. Whilst it makes the beneficiaries wealthier, that in itself does not always lead to enhancing their lives.
Intergenerational planning on the other hand is about making sure that ‘the right people get the right money at the right time’. It is often about emotions, deep-rooted beliefs and unspoken (or even unconscious) conflicts.
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1. The gifting conundrum
Most of us believe that the number of reasons to give our children money diminish as they get older. However, often, the list of reasons not to give them money gets longer and the emotional barriers to gifting get stronger.
It’s what we call the gifting conundrum, and it is outlined in the table below.
|Age (ish)||Reasons for reluctance|
|0 to 21 years||- Don’t want them to have access to a lot of money|
- Unsure of who they will be when they are older
- Can you trust them not to blow it?
- Will it spoil them?
|21 to 35 years||- Don’t want to take away their drive|
- Want them to find their own feet in life
- Don’t want to make it ‘too easy’
|35 to 55 years||- They already have enough money|
- You don’t agree with their spending habits
-You don’t like their spouse
- You do like their spouse but are worried about divorce
- Worse still, all of the above
|All ages||- You want to treat all your children equally |
- You may want to help one child but not another
- Children’s needs are not always equal
So, we’re worried they’ll blow it when they’re young, but as they mature we don’t want to take away their drive. Then, if they use that drive to achieve success, we don’t end up giving them any money anyway because they already have enough. It seems like they can’t win!
Unfortunately, as a result, ‘inertia’ kicks in for many people, so they do the minimum, only helping out financially when it’s absolutely necessary. This brings us to ‘the disastrous legacy’.
2. Inertia and the disastrous legacy
So, the parents haven’t created an intergenerational plan and die with a huge tax bill, leaving the kids with a big lump of money on some random date in time, often when it’s no longer really needed.
By this time in life, the children’s expenditure habits will be fixed. So, even if the inheritance significantly increases their wealth, they are likely to continue to continue enjoy a similar lifestyle to the one they have become accustomed to.
Ultimately, this path will lead them to fall into the exact same trap that their parents did, leaving all of their wealth to their children on death, when they too don’t need it anymore.
3. Gift and guide
Whilst gifting throughout your lifetime can help to reduce inheritance tax, it also provides the opportunity to guide your loved ones on their financial plan and pass on your values.
Ask yourself this: if you are uncomfortable gifting modest amounts during your lifetime whilst you have influence and can offer guidance and support, why would you give them all of it on death when you have no influence at all?
4. The power of conversation
“Every problem exists in the absence of a good conversation”
Money (or ‘the m word’) can often feel like an awkward topic to discuss with your loved ones. But these conversations can have life-changing results.
Often, younger clients who are likely to receive a significant inheritance are working on a financial plan that is wildly inaccurate. Therefore, they save more than they need – sometimes funding this through two jobs when one partner could be at home with the kids if they wished. Or, they may stay in a higher paid job that is causing stress both for the individual and the family as a whole, purely because they mistakenly believe that they need the money.
5. Ask for advice
Of course, the best option for any wealth management conundrum is to speak to qualified, trusted experts.
At Equilibrium, our service aims to identify your life goals and aspirations and create a plan to achieve them.
We will coach and guide you along the way, arming you with the confidence to make better financial decisions for you and your loved ones.
If you would like to learn more about how inheritance tax and intergenerational planning can help you to look after your loved ones and leave a powerful legacy, why not watch our on demand event here.
Disclaimer: The content contained in this blog represents the opinions of Equilibrium Investment Management LLP (EIM) and Equilibrium Financial Planning LLP (EFP). The commentary in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the viewer. Past performance is never a guide to future performance. Investments may (will) fall as well as rise and you may not get back your original investment.