Help clients avoid the pitfalls of early inheritance

In this environment, parents are increasingly looking to early inheritance – passing down wealth when their children need it most.

As this trend gathers momentum, a common conflict is emerging: parents are unsure when, how, and how much to pass down.

How can advisers help their clients to avoid the pitfalls of early inheritance?

Plan ahead

With increased university fees and an incredibly expensive property market, parents are having to financially support their children for longer than before.

Alongside this, an increasingly ageing population means parents are expected to live longer than ever.

If someone chooses to retire at age 50, they could be looking at a 40-year long retirement – so it’s important to factor in the lifestyle that clients want in retirement, how they will fund this, and any costs of care later in life.

Clients want to retain flexibility while also ensuring there is a robust plan in place for themselves and the next generation.

Are parents better off gifting a deposit, or setting up a buy-to-let property for their child?

To plan well in advance for this, every year we review clients’ family structures and discuss any family milestones that have emerged or moved.

Cash modelling to forecast potential expenditures is also strongly recommended.

Mapping out clients’ future cash flows helps them feel secure about the decision they make of how much to gift and when.

It provides them with peace of mind, certainty, and a buffer so they know that they can look after their children, as well as themselves, in older age.

Know your risk appetite

Assessing clients’ risk appetite, and capacity for risk and loss, also plays a crucial role.

When building any client’s portfolio, having detailed conversations about risk from the outset will mitigate any uncertainty or surprise further down the line.

Think outside the box

Many of our clients have made their own wealth, and are keen to pass this entrepreneurial streak onto the next generation.

To ensure their children still have the drive to work, earn and be independent, one solution is to phase instalments across a number of years to provide financial support at life’s biggest milestones – whether that’s a house purchase, a move abroad, or setting up their own business.

Put down roots

Are parents better off gifting a deposit, or setting up a buy-to-let property for their child?

Buy-to-let used to be a popular way to pass down wealth, especially for a child at university. However, with its increasing complexity, it’s becoming a less popular solution.

If there is inheritance tax to pay but you don’t want to sell, one solution could be to structure a loan against it to pay the inheritance tax.

Tax planning

Tax planning is a key part of the wealth and inheritance planning agenda which we explore with clients throughout their life.

One solution for clients who don’t have to draw down on their pension and have other assets to fund their livelihood, is to leave their pension pot untouched and then pass this directly onto their children.

See the value in education

The children of our clients who are inheriting wealth – sometimes unexpectedly, and sometimes significantly more wealth than they thought they’d have at a young age – are keen to learn how to manage their new lifestyle responsibly.

For the past five years we have run educational seminars for the children of our clients to discuss the practicalities of how to manage their new-found wealth.

For parents and children alike, this educational aspect of the process proves invaluable.

Liz Bottomley is managing director of private banking at Arbuthnot Latham