Many families in the UK will find themselves playing a part in the “great wealth transfer”, the movement of £5.5 trillion from baby boomers to younger generations over the next two decades.
People in their sixties and seventies, conscious of the benefits that they have enjoyed from rising property prices and a relatively stable economic climate, are often keen to help their children and grandchildren, who are facing higher living costs and rising interest rates.
This help might take the form of an inheritance on the parent’s death, significant lifetime gifts or regular help with grandchildren’s school fees.
Despite this, money generally remains a taboo subject within families. The reasons for this come from both generations; parents may prefer not to turn their thoughts to their own mortality, and children are reluctant to raise the issue out of fear of seeming presumptive or greedy.
This silence presents a particular problem at the moment, with frozen tax thresholds and recent regulatory changes (such as the fact that from 2027 pensions will be included in a person’s taxable estate on their death) meaning that more families will be brought into the inheritance tax (“IHT”) net.
Good estate planning can help to mitigate the IHT bill on death, but a sensible plan usually requires at least some degree of discussion within families.
From a parent’s point of view, an understanding of their adult children’s financial position and ability to manage money can be crucial to deciding how and when funds might be passed down to them. For a child, having an idea of what to expect in the way of lifetime gifts, or on a parent’s death, can help greatly with decisions they might need to make about housing and school fees.
From a practical point of view, an often-used estate planning strategy involves gifting funds to the younger generation as soon as possible to start the “seven-year clock” running for IHT. For this to be successful, parents need to be able to communicate their intentions to their children, and to be able to see how well the children are dealing with the funds that they receive.
For both sides, an open discussion about how plans might unfold in future can avoid disputes within the family after a parent dies, particularly between siblings. Parents often play an important role in maintaining family unity, and there is a risk of this falling apart once the parents are no longer there to mediate. There has been a steady rise in contested estates in recent years, in part resulting from the increase in blended families, and it is often the case that the issues that arise post-death could have been avoided through better planning and more transparency during the parents’ lifetimes.
How best, then, to get discussions started?
To begin, it can be helpful to acknowledge that the conversation may be an uncomfortable one for everyone involved; explaining that the purpose of the discussion is to avoid further difficulties down the line can be way of focussing minds.
Children will in all likelihood want to know that their parent is going to have sufficient funds to look after themselves for the rest of their lives. Engaging a financial planner to carry out a cashflow exercise, enabling parents to have a solid plan for a variety of scenarios, including the need for long-term medical care, can provide a good deal of reassurance for both sides.
If needed, involving a financial planner or solicitor in the discussions themselves can help with formulating a plan, and preventing discussions becoming emotive.
Finally, it is important to remember that speaking with family is only part of the estate-planning picture – it is crucial to ensure that your wishes are reflected in a properly-drafted will.