Leaving a legacy: the folly of youth
Like most of us, when I was younger, I never really thought about planning for my financial future. Naively, I assumed it would fall into place as I got older. So, at age 18 when my Aunt bequeathed me some money in her Will, buying a car and going on holiday seemed like the obvious thing to do. “Of course she would have wanted to see me enjoy myself” or that’s what I told myself anyway!
Many years on I realise my Aunt likely had higher aspirations for the money she spent her life earning – a deposit for a house, cover my university fees or a longer-term investment maybe? I just couldn’t see that at 18!
I tell this story not to apologise to my Aunt (although I probably should) but to highlight that despite your best intentions, there isn’t a whole lot of control you can exert on your estate and the money your beneficiaries will inherit once you’re gone, and you can’t just assume they’ll do what you want with it.
In this article we’ll take a look at how you can get your beneficiaries in the best shape to receive their inheritance, highlighting some of the pitfalls of the most popular routes to pass it on to them and how you can attempt to retain some of that control, if that’s what you’d prefer.
Make sure YOU are sorted first
Before any of these ideas get put into action, it’s worthwhile taking a step back and thinking about YOU and knowing what you have, where it is and what you’ll need to cover the rest of your life. You cannot worry about others until you know you will be OK. A discussion with a financial professional specialising in Inheritance Tax is a good place to start.
WHO do you have in mind and what is their personal and financial position?
Everyone has different priorities and different needs at different times. These priorities might not be the same as yours were at their age.
Now it’s time to think about what they actually want. Unlike generations before, depending on which generation you’re looking at, by the time they’re in their 30s and 40s, they may not have had kids yet. Their careers could have been their priority, working their way up the career ladder, rather than the property and family ladder. Or they may have had all this and be divorced and starting again.
These are a very different set of considerations than any generation before, so why not ask the person you have in mind what they would want? It may be that they don’t need the money at all and are actually more interested in the assets skipping a generation and paying for the next generation’s school fees for example (perhaps more what my Aunt had in mind!), or maybe they don’t need it at all and would like you to give it to charity.
HOW will the recipient respond?
Think about if they’re ready to receive it. We’ve all heard stories where people have gone off the rails having been made rich overnight and can’t handle the change. Others may never be able to cope with it - those with special needs for example. It may turn out the best gift you can give them is some financial education- tee this up with a professional adviser, and perhaps start small to get them used to the concepts of money, or at least start to understand the basics of finance and investing.
Do you want to retain CONTROL? And what are your options?
There are some interesting and tax efficient ways to gift money. Junior ISAs provide an annual limit of £9,000, with tax free growth and dividends. However, the receiver gets access at 18 and there’s nothing to stop them taking the funds and buying that car or going on the 18-30s holiday (is that still a thing??).
Junior SIPPs are another route – a limit of £3,600 each year including an uplift from the government of 25%. These can be controlled by the ‘child’ at 18, but cannot be accessed until retirement age (currently 55). However, this is likely to change and could mean they are well into their late 60s if not 70s by the time they retire. This will at least stop any crazy car purchases, but will it make a difference when they most need it- a house deposit for example? They could also be exposed to the vagaries of tax changes over such a long time period.
Bare trusts, straight cash gifts, designated accounts; each have pros and cons in terms of allowances, tax efficiency and control. You may hear a lot about trusts, and they can be a useful tool, but with them can come a lot of costs, taxes and complication. It’s really worth speaking to a professional to discuss what options might be suitable, or not.
Thinking about the next generation is a big decision and gifting hard earned assets away is not on everyone’s radar immediately.
Starting small is a good way to begin. It gets you used to gifting assets away as well as those receiving them getting used to having more money. This should give you more peace of mind as hopefully they prove they can handle the change.
Remember it’s not all about money. What about the administration burden on your Estate when you are no longer around? Simple things like having a Lasting Power of Attorney in place and making sure your Will is up to date and it reflects your wishes can alleviate some of the stresses for both you and your beneficiaries.
Ultimately, and perhaps unsurprisingly, controlling what happens to your money after your death is tricky. However, with some forward thinking and a focus on both you and the person you want to receive the money, perhaps your descendants can be a little more sensible than I was.
Sorry Aunt Wilma.
The information and/or any reference to specific instruments contained in this document does not constitute an investment recommendation or tax advice. Capital at risk. The value of your investments and the income from them may go down as well as up, and you could get back less than you invested. Tax rules are subject to change and taxation will vary depending on individual circumstances.