You’ve worked hard to accumulate your current wealth and assets, and (hopefully) your portfolio is now providing you with the financial support you require in retirement.
Let’s just say here, we’re not talking about wealth in terms of multi-millions. Your wealth is what you have as your ‘nest egg’, and it is what it is. This article isn’t about your wealth now, but where it goes after your death.
What is intergenerational wealth transfer?
Intergenerational wealth transfer is the passage of wealth from one family generation to the next. Estate planning should always include intergenerational wealth transfer provisions. These provisions will ensure that whatever wealth and assets you leave behind will be passed to the next generation. That includes your children, grandchildren, nieces, nephews, step-children, and any other extended family members you wish to include.
Shifting assets for baby boomers
If you’re part of the baby boomer generation, succession planning and intergenerational wealth transfer is a crucial part of your estate planning strategy. As your generation reaches retirement age, you’ll be part of a vast shift in assets, unlike any that we have seen before.
Bigger wealth transfers
It has been predicted that wealth transfers will almost double from £69 billion to £115 billion by 2027.
Coined as ‘the Great Wealth Transfer’ of the 21st century, this can potentially become a major issue for all your family members.
- If wealth transfer is done properly, it can make a significant difference to the financial position of the beneficiaries.
- If not done well or misjudged, it can cause conflict and resentment in the family that are never forgotten - or forgiven.
A wider impact
One aspect of leaving your wealth to the next generation that you may not have considered is the impact on other family members, and in particular your adult children. They will inevitably involved in your transition from working life, perhaps selling your business, and their former family home, and they need to be prepared to deal with the financial implications.
- Your adult children may be expecting to receive a certain amount of money, especially if you are selling a business – and end up disappointed.
- Equally, they may not be expecting to receive anything in your will, and find it difficult to deal with the tax and overall implications of an inheritance windfall.
Contributory factors
According to the King’s Court Trust, £5.5 trillion will change hands in the United Kingdom between now and 2055, with this move set to peak in 2035. The pandemic may have fuelled this rise, given that many in retirement spent less, whilst their investments bounced back after initial falls and property prices rose.
That’s why it’s important to have an open and honest conversation with your children about their expectations. You will also need to judge whether your adult children (and older grandchildren) can effectively manage the financial aspects of their inheritance.
As a parent, you may have never actually discussed your financial affairs with your children. You may find that adult children are surprised at just how much you’ve accumulated, (and how valuable your pension is compared to theirs!)
Helping your children take on your wealth
If you can, help your children establish their own firm financial footing so that they will be ready for intergenerational wealth transfer. You can introduce them to your professional advisers such as financial advisors and accountants, so they know who they can turn to for advice now and after your death.
These open conversations with your children will also ensure that your family are all on the same page and know what your wishes are. This can help reduce potential issues later on. According to an article by Which? many law firms saw a surge in enquiries about contesting a will due to “complex families, an ageing population and the prevalence of high-value properties in people’s estates”.
IHT and passing on wealth
Decisions on who will receive what and when need to be balanced by the tax implications of your proposed estate 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. It’s worth noting that UK Inheritance Tax receipts exceed £3bn from 17,900 estates.
10 questions to ask yourself
Here are 10 questions you should think about before and during your intergenerational wealth transfer planning:
- How did the timing of my becoming ‘wealthy’ influence my values and family relationships?
- What impact does my wealth have on my life and the lives of my family?
- What was the key to my success in creating wealth? Would telling this story to my future generation be useful to them?
- What is my biggest concern about my children or grandchildren being affluent?
- When growing up, what sort of conversations (if any) did I have with my parents about money?
- If relevant, how did my parents prepare me to receive their wealth?
- What lessons did I learn from my parents about money and finance that I would like to pass on?
- What family values would I like to pass down to the next generation?
- What concerns do I have about my adult children inheriting and managing the family wealth?
- How can I help prepare my beneficiaries to receive wealth and carry on our family legacy?
Managing expectations
When there are significant amounts to be passed down, and have been passed down before, those in line for inheritance could become over-reliant on their expected share of your estate. So, it’s important that younger generations know or can access professional advice how to handle the wealth they will be inheriting.
If you’d like advice on smoothing the transfer of wealth through estate planning and writing a comprehensive and clear Will to reflect this, contact Paul Hammond here at Panthera Estate Planning.