If we were to ask you where you would like your home and money to go when you pass away, you’ll probably say to your family, and that is no surprise. You have worked hard to earn what you have and besides, it’s a parent’s prerogative to look after their children no matter what their age!
The only slight hiccup in this plan is the potential for a mighty inheritance tax bill if you are lucky enough to have a generous estate to pass on to your family. But fear not, with some careful planning you can reduce the amount paid to HMRC, leaving more for your family to enjoy.
So, what is Intergenerational planning?
As the name suggests, it’s all about planning for future
generations. It’s an important part of financial planning which ensures the
right amount of money goes to the right people, at the right time.
If you want to continue providing for your children, grandchildren and even great grandchildren after you are gone, intergenerational planning is a must.
You may not have heard of Intergenerational planning before and therefore be surprised to learn you have probably already covered some of it with your financial planner. It can be done without actively considering it. However, it is well worth giving some serious thought to where and who you would like your assets to go to, both now and in the future.
Why is it important?
People are living longer so families are getting bigger. By the time you pass on there could be three or more generations who you would like to look after. Because of this, Intergenerational planning is becoming more and more important when reviewing your finances.
Intergenerational planning and Inheritance Tax (IHT) planning go hand in hand. By taking a look at your finances, you could also help to spread the cost of any IHT across generations.
Thanks to increasing asset values, you could be sitting on a huge IHT bill, and you might not even know it!
With property prices still on the rise, you could find yourself breaching the IHT barrier, or heading into the higher threshold. If you would prefer the wealth you have accumulated go to your family rather than the tax man you should seek advice on how to reduce the tax your estate would attract.
What solutions are there?
As always, the options on offer will differ for each individual. No two circumstances are the same and so should not be treated as if they are.
We are going to take a look at the most common options given. You may notice that these solutions are not specific for Intergenerational planning. They are often spoken about when planning for IHT in general. Congratulations, you have been paying attention!
You can always gift your money to your family over the years. But remember, there are limits on how much you can give away, tax free, each year.
It’s better to give gifts as early as possible as the seven-year survival rule applies. If you die before seven years is up, the gift will remain liable for inheritance tax.
It’s worth bearing in mind when giving a gift you are giving away your money. It will no longer be available for you should you need it in later in life.
It is likely that, if you are a home owner, most of your estate is made up from your property.
As part of your intergenerational planning, you may want to pass your home on to your family. There are two ways in which this could be done.
- It is possible to transfer your home into your children’s names. You will have to pay rent to live there in order to avoid IHT implications.
- You could sell your house and pass on the proceeds but bear in mind the 7-year rule also applies here. Your estate will also still pay inheritance tax if you die before then.
Here is where you can save some money for your grandchildren or great grandchildren, safe in the knowledge that they won’t have access until you deem them old enough. There is also the added bonus of avoiding implications of inheritance tax.
Trusts are a long-term planning tool for your intergenerational planning. The assets you put aside could be used for school fees, or to help your relatives get that first foot on the property ladder.
Types of trusts:
- Bare or Absolute Trust. This is the most basic option; it allows the beneficiary to access the funds in the trust when they turn 18 or 21.
- Discretionary Trust: This option offers you more control. It can allow trustees to control how the investments are managed and paid out to the beneficiaries until the trustees believe the beneficiary to be mature enough to have full access.
Trusts can continue for many years so, if you have a tidy sum to pop in one, you could help to provide a financial safety net for generations.
Don’t forget about your pension. After many years of building up your pot you should make sure that it is put to good use once you are gone.
If you pass away before the age of 75, the money in your pension pot can be passed on to your dependants, tax free. Once you have reached the age of 75 your funds become taxable. It may, however, be possible to pass what is left in your pot into the pension of a beneficiary, taxed at their own marginal rate.
If you are unwell this one is particularly useful for passing on large sums of money to a family member, making sure they remain financially supported even after you are gone.
How do you ensure the money you pass on continues being used in the best way possible?
It’s a smart idea to talk to your family if you are making intergenerational plans. After all, they will be benefiting from it. It also makes sense to not only pass on your wealth, but also the adviser who helped look after the wealth.
Advisers could be seen as financial mentors for younger family members. Helping to build a relationship between your family and your trusted adviser means you will know you are leaving your family in good hands.
By doing so you are helping your family to build their wealth. Which means they will be able to continue benefiting from the services you have been enjoying.
Seek Financial Advice!
As with most financial decisions, rules apply, and different tools will impact individuals in different ways. We know, why can’t anything be straight forward, right?
It can be easy to get things wrong if you go it alone which could have very expensive implications. So, as ever, our number one top tip is to make sure you seek professional and independent financial advice!
Here at Face to Face Finance we understand that planning for the future of your family is a bit daunting, and something you definitely don’t want to get wrong! Luckily, we have a friendly team who can assess your situation and talk you through your options. The sooner you begin financially planning for your and your family’s futures, the better.
Call us to make an appointment to pop into our office or we can come to you!