Intergenerational wealth transfer is essentially about transferring wealth from one generation to the next.

This can be done through a variety of means, including inheritance, gifting money or property, trusts and investing in life insurance, each with their advantages and disadvantages.

National statistics show that the net worth of the population is rising and people are living longer, so the earlier you put plans into place, the more options you will have.

Transfer of wealth to the next generation can be a complex and sensitive process.

Families should carefully consider their goals and objectives before embarking on this type of planning, especially as it may be possible to significantly reduce your estate’s inheritance tax burden.

We spend a lifetime generating wealth and accumulating assets, but not many of us ensure that it will be passed to the next generation, whether it’s our immediate dependents, grandchildren, nieces, nephews, and so on, in the most effective way.

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Why do people transfer wealth to their dependents?

One of the key reasons people transfer wealth to their children is to help ensure that their legacy lives on. Many UK families work hard to build up wealth over generations, and they have a deep desire to pass this legacy on to future generations. By providing a financial inheritance or other forms of support, parents can help ensure their children and grandchildren have a solid foundation for success and continue the family name with pride.

Another reason why people may choose to transfer wealth is because they want to give back. Having raised kids into successful adults and established a strong reputation in their community, many parents feel a strong desire to share some of their resources with those who helped them along the way.

Whether through supporting their child’s career endeavors or helping out in more direct ways like paying house deposits or for further education / school fees, transferring wealth allows parents to directly support the next generation and leave a positive impact on the world around them.

Ultimately, there are many factors that drive people to transfer wealth from one generation to the next. Whether motivated by a sense of duty or desire for gratitude, this decision typically reflects an underlying drive for long-lasting stability and prosperity across generations.

Why is intergenerational wealth transfer important?

It’s becoming increasingly important for more people to consider succession planning and intergenerational wealth transfers as part of their financial planning strategy.

In the UK the over-45’s hold more than 80% of household wealth and as the “baby boomers” generation reaches retirement age, we’re on the brink of a vast shift in assets, unlike any that we’ve seen before.

So let’s look at some of the factors that we need to consider:

1) The Great Wealth Transfer

By 2027, it is expected that wealth transfers will nearly double from the current level of £69 billion to £115 billion and it has been coined as the great wealth transfer of the 21st century.

Wealth transfer can be a huge issue for all family members concerned.

  • Done well and executed properly it can make a real difference to the financial position of all recipients and help build long-term financial stability and security.

  • If misjudged or poorly handled, it can cause enormous issues, conflicts and resentments that are never forgotten nor forgiven and often can split families.

2) The Financial Implications

One aspect that hasn’t been widely considered is the impact on other family members and in particular the younger generation, as their parents think about:

  • transferring ownership of, or selling their businesses
  • retiring from their careers
  • perhaps selling their family home
  • starting life in retirement.

It is important that you are now prepared to deal with this process. Not least so that they are aware of the financial implications and how they may be affected themselves.

For instance, children may be expecting to receive large sums of money from their parents, or expecting to take over the running of a business (instead of it being sold), and may end up being disappointed.

Conversely, they may not be expecting to receive anything and are therefore not equipped to deal with such a big windfall.

3) The Contributory Factors

According to the Kings Court Trust £5.5 trillion will move hands in the United Kingdom between now and 2055.

Why?

The main two reasons are increased net worth and life expectancy.

For those approaching, or are already in retirement, it’s important to have frank and open conversations with your children to manage their expectations and also establish whether they have the knowledge and understanding to handle financial matters.

kings court trust quote

For the older generation, this is not an easy exercise. You may not want to discuss your financial affairs with your children. You may find that their eyes are opened when they see what you’ve been able to achieve financially and it may create a sense of entitlement. They may even want to know how they can do the same for themselves and change their own financial habits.

Everyone works hard to provide for their family and perhaps, even leave them a legacy. However, as you approach retirement you shouldn’t feel that your family is solely reliant on you or that you need to be responsible for your children’s financial situation.

We should also consider expressing wishes and a good approach is to help the younger generation establish their own strong financial footing and be ready for intergenerational wealth transfer. For instance, introducing them to your own financial adviser can provide comfort that there is someone they can go to for wealth management advice.

How should you structure your estate so that it’s easier for your beneficiaries to manage?

Managing an estate can be a complex and time-consuming task, particularly if the estate is large or consists of multiple properties.

If you’re looking to make the process as easy as possible for the beneficiaries, there are a few things to keep in mind.

First, consider creating a trust. This will allow you to specify how and when your assets are to be distributed, and can help to avoid the need to go through probate after your death.

Second, be sure to keep accurate records of all your assets, including bank accounts, savings and investment products, real estate holdings, and business interests. This will make it easier for your executor to locate and distribute your assets according to your wishes.

Finally, consider naming a financial power of attorney. This person will be responsible for managing your finances in the event that you become incapacitated, and can make things much easier for your family during a difficult time. By taking these steps, you can help to ensure that your estate is managed in the way that you desire.

Having open conversations and expressing your wishes and goals will also ensure that your family are all on the same page. This can help reduce potential conflict later when the transfer of wealth occurs.

Here are some questions you could ask yourself about your individual circumstances when thinking about your wealth transfer plans.

  1. When did wealth enter my everyday life and how do I think this timing influenced my values and family relationships.
  2. What impact does affluence have on my life, and the lives of my next generation?
  3. What was the key to my success in creating wealth and would telling this story to younger people be helpful?
  4. What is my biggest concern in raising my children or grandchildren with affluence?
  5. What conversations, if any did I have with my parents about money and wealth management growing up?
  6. How did my parents prepare to receive wealth?
  7. What lessons did I learn from my parents about money, finance, investing and wealth management, that I would like to pass on to my children?
  8. What family values would I like to pass down to the next generation and how do I plan on communicating this family legacy?
  9. What concerns do I have about my adult children when it comes to inheriting and managing the family wealth?
  10. How can I prepare my beneficiaries to receive wealth and carry on the family legacy?

Can wealth transfers skip a generation?

As people continue to live longer, when they start thinking about the transfer of their assets, their dependents may already have successful careers and families of their own. This is the reason the family should talk before they transfer any money or investments.

In some circumstances, there is a potential for wealth to cascade directly into the grandchildren who will probably need the money the most pay towards university fees, getting on the property ladder and perhaps a private pension.

wealth transfers property gift

Tax implications associated with intergenerational wealth transfers

There can be significant tax implications depending on the structure of the transfer. By making advanced preparations, the burden of filing complicated inheritance tax returns can be reduced.

This type of planning can be extremely complicated and whilst some people may be able to do this for themselves, the vast majority, will need expert advice from someone experienced and qualified to give this type of advice. Therefore, I highly recommended you to seek expert advice.

For example:

  • If you gift property to a family member, there may be gift tax consequences.
  • If you sell property to a family member at less than fair market value, there could be capital gains implications.
  • If you establish a trust for the benefit of your family, there could be estate tax consequences.

In Summary

So despite the vast amount of wealth that’s likely to be passed down between generations, there’s always a danger that those in line for inheritance could end up being over reliant on their expected windfall.

And I see that quite often.

The key will be to ensure younger generations are able to get involved and understand how to handle the wealth that they will be inheriting, as well as being able to make good decisions about the wealth that they generate themselves.

You need to consider who will receive what and, whether you want to pass your wealth during your lifetime or on death. That’s a huge decision to make.

And often it’s a combination of the two.

These decisions then need to be balanced by the tax implications of any proposed planning.

This is especially important at what can be a highly stressful time.

It costs absolutely nothing to have an initial 30 minute discussion with a financial adviser about intergenerational wealth transfers.

Contact Tony Thomas on 07585 592494, email tony@ttwealth.co.uk or book a discovery call by clicking the button below.

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