Making a real difference to the financial position of the recipients
With careful planning it is possible to significantly reduce the need for your estate to pay Inheritance Tax. We spend a lifetime generating wealth and assets but not many of us ensure that it will be passed to the next generation – our children, grandchildren, nieces, nephews, and so on. Estate preservation planning is the transferring of wealth from one family generation to the next.
It’s becoming increasingly important for more people to consider succession planning and intergenerational wealth transfer as part of their estate preservation planning. Increasingly as the baby boomer generation reaches retirement age, we’re on the brink of a vast shift in assets, unlike any that we have seen before.
The transferring of wealth from one family generation can be a huge issue for all family members concerned. If done well and executed properly, it will make a real difference to the financial position of the recipients. If misjudged or poorly handled, it could cause enormous issues, conflicts and resentments that are never forgotten nor forgiven.
One aspect that hasn’t been widely considered is the impact on other family members, and in particular children, as their parents think about selling their business or retiring from their career, perhaps selling their family home, and starting life in retirement.
It is important that children are prepared to deal with this process, not least so they are aware of the financial implications and how they may be affected. For instance, children may be expecting to receive a certain amount of money from their parents – particularly those who are selling a business – and end up disappointed. Conversely, they may not be expecting to receive anything, and are therefore not equipped to deal with a windfall.
For those approaching, or in, retirement, it’s important to have frank and open conversations with children about expectations and also whether children have the knowledge and understanding to manage financial matters.
This is not an easy exercise, as you may not want to discuss your financial affairs with your children. You may find your children’s eyes are opened when they see what their parents have been able to achieve financially. They may even want to know how they can do that themselves and change their own habits.
Everyone works hard to provide for their family, and perhaps even leave them a legacy. However, parents approaching retirement shouldn’t feel that their family is solely reliant on them, or that they need to be responsible for their children’s financial situation.
A good approach is to help your children establish their own strong financial footing and be ready for intergenerational wealth transfer. For instance, introducing them to your professional advisers can provide comfort that there is someone they can go to for advice.
Having open conversations with your children and expressing wishes and goals will also ensure that your family are all on the same page, which can help reduce potential conflict later when managing intergenerational wealth transfer.
These are some questions you should answer as part of your intergenerational wealth transfer plans:
When did wealth enter my life and how do I think this timing influences my values and family relationships?
What impact does affluence have on my life and the lives of my next generation?
What was the key to my success in creating wealth and how might telling this story to my future generation be helpful?
What is my biggest concern in raising my children or grandchildren with affluence?
What conversations (if any) did I have with my parents about money and wealth growing up?
How did my parents prepare me to receive wealth?
What lessons did I learn from my parents about money and finance that I would like to pass on to my heirs?
What family values would I like to pass down to the next generation and how do I plan on communicating this family legacy?
What concerns do I have about my adult children when it comes to inheriting and managing the family wealth?
How can I help prepare my beneficiaries to receive wealth and carry on our family legacy?
Despite the vast amount of wealth likely to be passed down between generations, those in line for inheritance could end up being over-reliant on their expected windfall. The key will be to ensure younger generations are able to get involved and understand how to handle the wealth they will be inheriting, as well as being able to make good decisions about the wealth that they generate themselves.
You need to consider who will receive what and whether you want to pass your wealth during your lifetime or on death. These decisions then need to be balanced by the tax implications of any proposed planning. This is especially important at what can be a highly stressful time. By making advanced preparations, the burden of filing complicated Inheritance Tax returns can be reduced.