Keeping wealth in the family

1. Start planning early

Planning what happens to your money and possessions when you die, can ensure the following:

• your money goes to the people whom you want to leave it to
• you reduce or even eliminate IHT to leave more to those you love
• your wishes are carried out without unnecessary expense or delay.

This might sound simple, but managing the transfer of your wealth after you’re gone is a complicated area with many financial and legal considerations. The best way to avoid unwanted consequences is to start making plans early.

Gifting capital during your lifetime can be very effective in helping to reduce the IHT liability but it is important to ensure any such gifts are affordable. Working with Old Mill, we are able to identify wealth that is surplus to your own requirements which you may like to pass to the next generation earlier. With the M&G report identifying that 36% of those surveyed had reduced or stopped their savings, and 23% reduced or stopped their pension contributions, a helping hand now to your family may be very welcome aside from the tax savings.

2. Make a will and review it regularly

If you don’t have a will, then your estate will be shared according to the rules of intestacy which may be very different from your wishes.

If you are married or in a civil partnership without any children, then the estate will pass to the survivor. Since July this year, if you have children; up to £322,000 will go to the spouse / civil partner and half the remainder, but the other half will be shared between any children. For deaths prior to 26 July 2023 the amount was £270,000.

If you are not married or in a civil partnership and have no children then the estate will pass to your family; to your parents, if they survive you or else wider family – siblings etc. If you have children, your estate will be shared between them.

With the annual census in 2021 finding that almost 1 in 4 couples living together are cohabiting rather than married or in a civil partnership, this could lead to unanticipated consequences on death. Whilst such couples might describe themselves or be described by others as being in a ‘common law marriage’, this is not a legal term and as such does not give them the same rights on death as those who are married or in civil partnerships. In particular, there is a specific exemption for assets passed on death between spouses or civil partners meaning that no IHT is due. This will not apply to those cohabiting so there could be some very unwelcome Inheritance Tax implications.

The consequences can be devastating for those you leave behind. If you’ve already made a will, review it regularly to make sure it’s kept up to date. A change in family circumstances, changes in IHT rules and wider legislation can all affect your will.

3. Set up a Power of Attorney

Sometimes people wrongly believe because they have a will they don’t need a Power of Attorney (POA). The POA lets you appoint someone you trust to make decisions for you if you’re not able to do so yourself, for instance if you become incapacitated. There are two types of POA: Financial which allows your attorney to deal with financial matters on your behalf, and Health, to make medical decisions for you. It might help to think of a will as something that helps your loved ones after you die, whereas a POA is designed to help you while you’re still living.

4. Make sure you know who stands to inherit your pension

It can often be overlooked that your will does not have any jurisdiction over who may inherit your pension benefits. This is normally determined by a ‘nomination of beneficiary’ form that should have been completed when the pension was set up. The people you list on that form will normally inherit your pension when you die and can do so without having to wait for Probate to be granted. Pension funds are often significant assets and over the years, it can be easy to forget who you’ve nominated to receive your fund. It is therefore important to regularly review nominations to ensure they continue to benefit the right people as all too quickly they can become out of date if your circumstances change. If you’re not sure who inherits your pension, your financial planner can help.

5. Speak to your loved ones about your succession planning.

This is often the step that’s forgotten about. It’s really important to keep your will, Powers of Attorney and pension nominations up to date and even more important your loved ones know how to get hold of them when they’re needed. By letting your loved ones know in advance you’ve done this important planning, it can make it a lot easier on them at what could be a very difficult time.

Whilst the family will have the support of your professional advisers, it can be very useful to outline to them what you hope to achieve with your estate on your death and your reasons. It is not necessary to mention the exact sums involved if you don’t wish to. This will help your family understand your specific plans and could reduce any potential disagreement. They may also have some relevant input into the management of your estate and it may be worth taking on board their expectations and opinions with regard to your assets and possessions. Often it will not be the money but small items of sentimental value that have the potential to be overlooked and go to the ‘wrong’ person.

Old Mill works with many families on a multigenerational basis. The last few years have seen an increasing number of clients helping younger generations as first Covid and then the cost-of-living crisis has impacted their finances.

The M&G report highlights that the number of people who have received a financial gift had increased in the last year, especially for those that had received a gift from Grandparents, which increased from 48% to 64% of those surveyed. Reasons for the gifts included:

Help with the cost of living. Gifting ‘to help with bills’ 21%; gifting to pay off debts’ 15%; and ‘money to help with rent and mortgage’ 16%.

Enabling property ownership. Gifts for ‘a house deposit’ 22%, support ‘an outright property purchase’ 14% and even more significantly, gifting of an entire property increased significantly from 10% to 16%.

Education and personal development. Gifting to support the cost of university rose as students wrestled with fees and the increasing cost of utility bills and student accommodation.

While on the surface, gifting sounds straightforward, it carries risks if carried out without expert financial advice as there are often important tax considerations to ensure gifts are structured effectively from a tax point of view.

The M&G report highlights the importance of intergenerational conversations, behaviours and actions. More generations are now sharing advisers to plan and manage wealth transfer and we are increasingly seeing children and grandchildren becoming clients in their own right.

Joined up intergenerational financial planning can be very powerful in supporting the management of family wealth and succession and is a topic that is always worth exploring during our annual planning meetings or as part of an ad-hoc meeting if a change in your circumstances brings this topic to the fore.