3 powerful reasons to create an intergenerational wealth plan today

While thinking of one’s mortality is never easy, if you’re over 55 you may be considering how best to leave your wealth to family and friends. If so, you might be interested in research by Aviva, which suggests that many in this age group would rather give money while they’re still alive, as opposed to when they die.

Gifting while alive could provide several advantages for you and your beneficiaries, and could help you reduce or negate any exposure your estate has to Inheritance Tax (IHT). When you consider that IHT is typically charged at 40%, reducing your liability could allow you to leave significantly more money to friends and family.

One way you could help ensure this is to create an intergenerational wealth plan. Read on to discover what this is, and three important benefits of creating one if you haven’t done so already.

An intergenerational wealth plan gives you more control

One of the most effective ways to ensure success is to prepare, and leaving your wealth to loved ones is no different. By creating an intergenerational wealth plan, you are creating a roadmap that will allow you to pass your wealth to beneficiaries as effectively and efficiently as possible.

Typically, intergenerational planning includes making gifts from your estate while you’re still alive, something that provides you with greater control over how it’s done. Furthermore, as you can explain your reasoning to family and friends, it could help prevent any future arguments over inheritance, something that could be on the increase according to a MoneyAge article.

It reveals that challenges to the distribution of inherited estates in England and Wales rose by 37% in 2021 when compared to 2019. Creating an intergenerational wealth plan and explaining your rationale behind the gifts you’re leaving could help prevent beneficiaries falling out after you die.

So with this in mind, let’s now consider three advantages intergenerational planning could provide for you and your beneficiaries.

1. You have more say about how your money is used

If you’re concerned that one or more of your beneficiaries will not use your money responsibly, you could use the intergenerational plan to set out how it should be used. This might be because you want to leave cash to a younger family member, but fear they will use it to buy the car of their dreams instead of using it to buy their first home or to fund university.

By speaking with the younger family member directly and creating a legal framework that only permits your money to be used as you would want, you’ll have peace of mind that the beneficiary cannot use the money in an inappropriate way.

2. You could reduce, or even negate, an IHT liability

HM Revenue & Customs (HMRC) allows you to have a certain amount in your estate on death before IHT is charged. Known as the “nil-rate band” (NRB), it typically provides up to £325,000 per person or £650,000 if you’re married before IHT is due (2022/23).

Additionally, you may be entitled to the residence nil-rate band (RNRB), which could boost these amounts to £500,000 or £1 million respectively, subject to certain stipulations.

As IHT is only liable on any assets you have that’s above your NRB, intergenerational planning could help you reduce your estate’s liability to the tax. This is because you can use it as a roadmap to ensure that you maximise the use of gifts that HMRC allow you to make every year. These include:

  • A total of £3,000 that can be gifted to an individual or split between many people
  • An unlimited number of gifts of up to £250 each
  • A £1,000 wedding gift to anyone, £2,500 wedding gift to grandchildren or a £5,000 wedding gift to your children
  • Regular gifts of any amount from your income. This must not be from capital and cannot reduce your standard of living.

Careful use of these gifts could allow you to reduce the value of your estate above the NRB, which will typically reduce any exposure to IHT. If you reduce your estate to below your NRB, it will not normally be liable to the tax.

If you need to make larger gifts in order to reduce your estate, you could instead use a potentially exempt transfer (PET). This allows you to gift any amount to anyone you choose.

The only condition is that you must then live for seven years afterwards for the gift to fall outside of your estate. If you do not, IHT will typically be charged on a sliding scale depending on how long you live for and other gifts you have made.

By creating an intergenerational wealth plan as early as possible you could increase the likelihood of success. Starting your gifting strategy at the age of 65 is much more likely to succeed than starting it when you’re 85.

3. You could pass money on when the beneficiaries need it most

Gifting to family members such as your children earlier on means they will probably receive your wealth when they need it most. If they still have a growing family and a mortgage, for example, receiving money could be of much greater use than later on when the children have left home and the mortgage is paid off.

Get in touch

If you are considering the best way to leave money to loved ones and would like to discuss whether an intergenerational wealth plan could benefit you, please contact us on info@janesmithfinancial.com or call 01234 713131.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Please remember that the taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

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