29 April 2018
Inheritance tax planning may be what springs to mind when it comes to conversations around the passing on of wealth to younger generations.
But the focus of these conversations may need to broaden out over the coming years. Because with a growing number of people expected to live into their 80s, 90s and even beyond, next generation beneficiaries aren’t going to be as young as they used to be.
The impact of shifting demographics on financial planning were highlighted in 2017 in a report by the Resolution Foundation. It said millennials - those currently between the ages of about 23 and 37 - would get “the largest and most wide-reaching ‘inheritance boom’ of any post-war generation”1.
Yet those millennials will typically be 61 years old by the time they inherit, the Foundation also estimated (based on the age of the parents). The boost to their finances that an inheritance delivers is therefore less likely to come at a stage of life when finances for many are traditionally most stretched - around the time of buying a home or raising a family, for instance.
Instead it will arrive as they themselves approach retirement, posing some potentially significant questions when it comes to intergenerational financial planning. Depending on the focus of your business, there are some obvious opportunities for advisers in here.
Playing the generation game
If intergenerational planning no longer means simply passing wealth to the next generation, we need to talk about what it does mean. And that will often require getting the family involved.
For instance, if passing on some wealth directly to younger family members is being discussed, the middle (‘sandwich’) generation might not realise they’ll be expected to share ‘their’ inheritance with younger family members (or with other beneficiaries, such as charities). Advisers can have a role here in supporting families as they try to ensure that intergenerational planning isn't a trigger for conflict.
While 64% of 25 to 45 year olds expect an inheritance, just 38% have actually talked about it to the person passing it down, according to research by Sanlam. It also found that a third said they would be reliant on the inheritance for their future financial security2.
Starting (and possibly mediating) the necessary conversation may be a service you feel you can provide, given the reluctance of family members to engage with what can be a tricky subject.
Understanding what’s at stake
Planning around passing on wealth generally involves dealing with assets including pension savings and property. But if the older generation live into their 80s, 90s or for even longer, there might not be much left to pass on. They may have been living off a pension pot for more than 30 years, and could have incurred potentially hefty care costs. The end result could be a property long since sold and a pension pot that’s empty or approaching that state.
Many advisers will, of course, discuss inheritance matters with clients long before they retire. This conversation may not currently involve the wider family. But the increased possibility of the client living to a point where there may be nothing much left to pass on, or the family perhaps have to get hands on financially for your client should they become more vulnerable with age, again suggests it could be beneficial to get them involved earlier on.
This way, expectations can be managed and sensible precautions – such as powers of attorney or provision for tax-efficient advance transfers of wealth - can be put in place.
Exploring the options
The likely life stage of chosen beneficiaries will dictate to some extent how assets are passed between generations. And that potentially gives you the opportunity to add value by exploring the options with your client.
For example, it may be that someone inheriting in their 50s or 60s will find a boost to their retirement plans helpful at this stage, but it might be more valuable at an earlier point, perhaps in the form of smaller, incremental amounts, passed on in the most tax-efficient way. Or maybe the best option in the longer term is to consider skipping a generation completely and passing wealth down from grandparents to grandchildren. There’s also the option for older parents to ease the burden on their children by making cash gifts to any grandchildren in the most tax-efficient way. This could be on an ongoing or one-off basis according to need.
Making it a family affair
All parties affected by an intergenerational family plan should ideally have some understanding of what assets there are and how much they are worth. The lead client’s adviser is perfectly placed to guide this, and – subject to your suitability assessment - consolidating or managing all relevant accounts through a single platform is one approach you could take.
Where more than one individual involved in an intergenerational family plan has an Account(s) on the Alliance Trust Savings platform, with relevant permissions we’re able to arrange view-only access for you even where you don’t currently have a direct advice relationship. The client simply needs to complete a Third Party Authorisation Form. This can be found in the Adviser Centre Literature Page.