‘When do You Plan to Die?..’ Generational Wealth

By Peter Gale, Senior Wealth Manager at Alexander Associates Group

Inheritance planning is something that used to be reserved for the ‘old rich’, who have been passing their wealth down through the generations for centuries.

However, the reality is that today it is something we should not just be considering, but planning for well in advance.

We spend our adult lives working hard and looking at ways to be ‘tax effcient’; keeping hold of the money we are accumulating and sharing less with the Taxman. But, when it comes to planning to be tax effcient with your legacy, it’s something that gets pushed to the bottom of the ‘To Do’ pile.

Should we be classing it as low priority? Or, should we be protecting our wealth now, so that we can provide a better life for future generations, when things may not be so rosy?

The topic of Generational Wealth planning becoming more common place; whether it is inheritance you may receive from your parents, or planning for the legacy you will leave behind – the point is to educate clients on the legitimate solutions to tax mitigation and the importance of robust planning.

We know that, in general, people don’t like to think about death – a fact that is supported when you look at the number of people in the UK who don’t have a Will.

According to Will Aid’s study in July 2014, just 48% of adults have a Will and out of those, 60% haven’t reviewed them in the last 5 years. Which means that the majority of adults in the UK simply don’t have any plans in place for their Estate in the event of their death. A staggering, 70% of cohabiting couples have no Will, which means on death, their surviving partner would have no automatic right to inherit.

To many, our family are our most valuable asset, so it can be quite hard to believe that we aren’t making plans to protect and provide for when our family will need it most. Almost everyone that I meet is able to reduce or eliminate their IHT exposure, but the complexities of generational planning, coupled with the new rules on inheritance tax, can be daunting. A combination of being overwhelmed and not wanting to think about our own demise, seem to be the main barriers to even starting the discussion.

The importance of having that initial, uncomfortable conversation pays dividends. We’d suggest beginning by breaking it down into manageable topics with the top 3 topics of conversation:

1. Housekeeping - The starting point here is the mundane, but vital paperwork. Questions you need to answer include:

• Is there an up to date Will in place?

• Has a Power of Attorney been assigned?

• Are ‘Nomination of Death Benefts’ and ‘Expression of Wishes’ forms complete and, again, up to date?

• Are relevant policies held in Trust?

Trusts can provide an important vehicle to hold money and assets outside of yours, and benefciaries’, estates and therefore, aren’t liable to Inheritance Tax. However, they are often not used, or set up, correctly.

Typically, trusts fall into two types; ‘Absolute Trusts’ have specifed nominated benefciaries at the outset, which cannot be changed.

Whilst ‘Discretionary Trusts’ can remain fexible, with availability to nominate potential future benefciaries, such as unborn grandchildren. The area of trusts is incredibly complex, so it’s not an area that people should attempt to do themselves.

The huge changes in Pensions has opened up opportunities on how you can pass your pension pot down to the next generation. Previously, you could only pass your Pension to your spouse or dependants.

But, the rules have been relaxed and you can now name a ‘Nominee’ to be the benefactor of your pension pot; with further ‘Successors’ available to be appointed on their death. As you can appoint anyone as your nominee, we are seeing a part of generational planning.

2. Gifting - On the whole, gifting is something that people can be wary of. The main problem is that none of us know how long we will live for, so knowing how much of our wealth to gift, and when, can be tricky. Plus, there are rules and limitations surrounding gifts, which can land you in hot water with HMRC.

You may be aware of the 7 year rule, which states that you need to survive for 7 years after making the gift for it to be IHT-exempt. If you die between 3 and 7 years after making the gift, and its total value is over the IHT threshold, the tax due is reduced on a sliding scale.

Mr Osborne does provide us all with some allowances when it comes to gifting. You can gift up to £3,000 annually and make unlimited gifts of £250, to different people. You can also gift up to £5,000 as a wedding or civil partnership gift.

These allowances are relatively low, so, whilst gifts should be part of a plan, they aren’t effective at substantially reducing your IHT liability.

Gifting out of income is defnitely an underutilised tool. The majority of people gift from their savings as capital, which not only affects their allowances, but often is not tax effcient. Whereas, so long as you have a suffcient revenue, regular gifts made out of income are immediately exempt from tax.

Many of our clients are now gifting from their income into Junior ISAs or pensions for their children or grandchildren. This not only moves money out of their estate tax effciently, but has the additional beneft of building a nest egg for the next generation.

Once you have gifted, you lose control of the assets, so it is important to plan your gifts to ensure that you don’t put yourself in an unstable fnancial position. Therefore, consideration needs to be made regarding whether you need access to the capital, the income, the growth – or a combination of all three. The most important point to remember is make a record of the gifts you are giving, as this will be assessed on death by executors.

There’s no doubt that Gifting can be a balancing act. So, there are solutions that move your money outside of your estate whilst enabling you to have access. For instance, a Discounted Gift Trust allows you to put a lump sum into a Trust for your benefciaries, with the ability to also draw a regular income.

The level of income is important as any unspent income falls back into your estate for IHT purposes.

Another option for retaining control of your money and bypassing the 7 year rule is Business Property Relief, which allows company shares and other assets in certain businesses to be passed down to the next generation without attracting IHT.

The assets have to be held for 2 years and still held on death to qualify, so it is often a good solution for people who are unwell or in old age. BPR only applies to certain companies, for some it might be worth this higher-risk strategy. Therefore, professional advice should be sought to determine if it should be considered as part of your personal plan.

BPR investment is also one of the few options within a Power of Attorney’s authority to mitigate IHT without breaching their responsibilities. With around 800,000 people suffering some form of dementia in the UK, and this number expected to rise year on year, Power of Attorney plays an important role in generational planning.

3.Protection - The last phase is to turn to protection. We put protection in place to pay any Inheritance Tax that is due on the remaining estate.

As long as regular premiums are paid, the policy will pay into a trust for the main benefciaries of the estate. So, when does inheritance tax need to be paid? It becomes payable 6 months after death, and the estate cannot be distributed until it has been paid. For an illiquid estate this can cause signifcant complications that can be eradicated with a protection policy, which will ensure that there are funds to settle the IHT due immediately.

It’s often assumed that life for the next generation will be abundant with opportunities for them to make their own wealth.

But, what’s gone before is not necessarily an indication of what will happen in the future. It’s another reason why we should safeguard our existing wealth for the next generation.

With the recent Government changes to IHT, and the fact that none of these are actually set in stone, it’s important to plan on the basis of what we know now as fact. Amendments can always be made to stay in line with legislation as it changes.

For instance, with the Main Residence Nil Rate Band tapering relief due to be phased in from April 2016, we will see an additional allowance for your main private residence – with the caveat being that it has to be passed to your children.

If you don’t know or understand the intricacies of the rules and regulations around IHT, then how can you make sure you have the protections in place?

Like a doctor doesn’t condone self-diagnosis, as professional Wealth Managers, AAG doesn’t support DIY solutions to IHT planning. We have seen so many clients come to us with plans in place that won’t stand up.

They think they have taken the right steps, but in fact the plans they have made will cause more harm than good. Knowing what you can do to manage your wealth across the generation is half the battle.

In our experience, it is better to start putting some structures in place if you want to make the most of the legacy you leave. Now is the time to have those diffcult conversations and take advantage of all your options.

Whilst it’s not a very nice thought, as Benjamin Franklin wrote, there are two certainties in life.

AAG Wealth Management (AAG) was founded in 1995 and backed by Lord Jacob Rothschild.

We set out to provide sound fnancial advice. Over the years, that objective has remained at the core of AAG. Our Wealth Management arm of the group has won numerous awards, which have been presented by notable luminaries including, Bill Clinton, Al Gore, Christopher Reeve, Lord Sebastian Coe, and The Rt. Hon. Lord Michael Heseltine.

Based in Mayfair, the Group has evolved and includes a CIMA regulated accountancy frm amongst others.

The achievements and successes we have been recognised for is testament to the work we do and, as a result, we have built a reputation second to none for innovative, tailored advice. We take a ‘family offce’ view to personal fnance, with a complete focus on the client as an individual.

Their confdence in us comes from our approach – we put ourselves in their shoes; only providing advice that we would want in their position.

Financial services may appear intimidating, but it doesn’t need to be. We guide our clients through the various facets of their personal fnances; from fnancial plans, investments, legal issues, mortgages and accounting concerns, our qualifed and experienced professionals are always on hand to provide the relevant assistance.

We use an analogy, to help clarify the AAG approach:

‘In this country, we all take for granted the presence and availability of our GP when we have a health concern.

Yet our GP is more than a doctor to treat minor ailments. He is also an extensive network of contacts, able to refer us to one of a plethora of specialists, depending on our condition. He confers with these s pecialists, keeps all our records and always has a detailed overview of our health, past and present. Why should the same centralised guidance and support not be available for our fnances?’ We have always believed it should be, which is why AAG exists.