Estate Planning
Many people with estates large enough to pay inheritance tax (IHT), defer decisions about avoiding this tax until late into retirement. If a prospective client in their 80s approaches us for advice about inheritance tax, we can often help but their age will necessitate a riskier, more aggressive approach to avoidance. We much prefer to reduce family’s IHT bills by a slow, gradual, and non-contentious process of gifting over a long-term period. This has the benefit of being the most likely advice to succeed.
The big blocker to gifting is the concern that the next generation will lose their ‘vigour’ if they are given too much, too early. Vigour in this context is their desire or need to work and to carve out a life for themselves. The second blocker is often a fear that 50% of any gift will walk away with a divorcing son-in-law or daughter-in-law.
Both concerns can be mitigated to an extent with the use of simple trusts, as the money is a gift but doesn’t go directly to the next generation. There is a limit to how much money can be gifted to a discretionary trust though (£325,000 per person, per 7 years) and therefore wider direct gifting might be needed. We cover these gifting options in the next section.
The best way to protect the next generation though is to make sure that they are advised. Controlling your adult children’s finances rarely results in a good outcome as there is too much emotion involved. Independent advice from a third party, is a great way to ensure that they are getting the right advice without the risk of them reacting against it.
Existing Altor clients have the option to pay for their adult family members (minors are included in the core service) at a substantially reduced monthly fee and from their existing wealth (thereby saving IHT on the advice costs). This is only possible with a flat fee model.
We see some common mistakes amongst the next generation. The first is an obsession with owning property that without parental gifts would not be close to being affordable, based on their own earnings. The main problem with property (ironically also one of its benefits) is its tangibility. Your children may have grown up in a certain standard of family home and want the same for themselves. The family home will have had a very tangible impact on them as a child, as a lot of their memories will be directly of the property. What they won’t have a sense of, or seen, is that you were also building up pensions, savings, and investments at the same time, so that you could afford to live in that property. Therefore, often when gifted money the first thought is to buy the biggest house they can, without understanding that your success also involved buying other assets alongside.
The best way to tackle this is to jump in a time machine, go back to when they were born and open a junior pension and junior ISA account for them. The second-best way is to get them some advice that can start educating them on the need for a spread of assets including the less tangible ones. The earlier this education can start the better, and each year as they turn 18, we gain a few more clients to start advising. Not the most exciting birthday present but the most valuable in the long-term.
Being on the receiving end of a large gift seems like an unalloyed good, but as we have explored in our Blog here, this can cause sudden money problems.
Estate planning is available to Altor clients in our Core Service.
Nothing on this website or its links constitutes a personal recommendation; the information contained is designed to be informative but not to be relied upon as individual circumstances could affect the relevance of this guidance.