LEAVING A LEGACY: WHY AN INHERITANCE PLAN IS WORTHWHILE
BY SIMON REED
For many people, passing wealth to children or grandchildren is seen as inevitable, but isn’t always at the top of their financial priorities. Quite often the focus is on investment management and securing a comfortable life in retirement. But now more than ever it is essential to have an effective plan for passing the torch to the next generation.
With wealth levels rising and families expanding around the world, estate planning has grown much more complex. According to the Centre for Economics and Business Research, some £1 trillion of wealth will be passed from one generation to the next between 2017 and 2027, with the amount being inherited each year rising from £69 billion to an estimated £115 billion. And as people move abroad for personal or professional reasons, managing wealth across borders becomes more of a challenge as each jurisdiction will have different regulations.
Given the factors involved, it’s no longer enough to simply have a will in place; there are multiple legal and tax implications that need to be considered. Through early and careful planning, it is possible to secure your own life in retirement while also ensuring your wealth will be passed to your loved ones.
PLANNING FOR THE FUTURE
Transferring wealth from one generation to the next may be one of the most important issues for a family to face, yet it is so often ignored. Many people are not comfortable with the topic. However, given that the preparations are likely to span tax and estate planning, as well as retirement, inheritance and succession planning, it is a good idea to plan for a wealth transfer as early as possible.
One of the first steps on the way to securing a legacy for the next generation is to take care of fundamental financial planning needs. This means making sure you have a will that clearly sets out your wishes. It may seem basic, but statistics show a staggering number of people don’t have a will in place, even those who are considered high net worth.
The next will be to work with your adviser to determine how much wealth you need to achieve your objectives for the rest of your life. This involves using cash flow modelling to establish your income needs and how they may change over time. From here, you can then think about what will happen to your estate in the future. This may include gifting to children and grandchildren, putting in place succession plans for a business, and donating to charity.
CREATE A GIFTING STRATEGY
Perhaps one of the bigger quandaries families face is when and how to gift wealth to children and grandchildren. One option is to make direct gifts. Each person has a £3,000 annual exemption for gifts that immediately removes this from your estate when used. Any gifts in excess of this amount will only be exempt from inheritance tax (IHT) if you live for at least seven years and you no longer have an interest or link to those assets.
Whether you decide to provide gifts in this manner depends on how you feel about providing large financial gifts to younger members of the family. Giving while living can work well if you are happy to let go of some of your wealth. But if you want to maintain an element of control over how and when the money is distributed, it may be better to give through a trust. This will allow you to draft instructions that will be executed by the trustees. Trust structures can be used for passing wealth to beneficiaries for general purposes or they can be used for school fee planning.
Away from trusts, wealth can be transferred through a family investment company, a life insurance policy or an offshore investment bond. Depending on your requirements, they may be more desirable than trusts, but it is important to bear in mind they come with tax implications that will need to be evaluated.
LEAVING A LEGACY
When putting together a wealth transfer plan, it is worth considering not just how you may pass on your wealth, but whether you want to create a family legacy that endures in the future. Achieving this means preparing the next generation to inherit wealth, either by increasing their involvement in the family’s financial matters or by providing education around managing finances.
Through careful planning and by using the right resources, you will benefit from the peace of mind that comes with knowing your legacy is secured for the next generation.