The problems of intergenerational wealth transfers

Using tax structures

Several industry experts stress that intergenerational planning is important to ensure wealth passes in a tax-efficient manner.  

Steve Pennington, director and head of wealth planning at Arbuthnot Latham, says: “Intergenerational considerations are often best addressed through having a well-managed wealth plan. Professional advice is best sought early, in order to enjoy the tax allowances that are available to younger generations through structures such as Junior Isas.”

He adds: “Many family trust arrangements therefore include provisions that will only allow access to wealth at the discretion of more senior family members, acting as trustees. One of the key considerations of Jisas is that the beneficiary becomes entitled to the funds at age 18, so if families have been saving effectively over many years using this valuable tax wrapper, a significant capital sum may be available to quite immature young people who may not yet have the knowledge and experience to handle the money responsibly.”

Sarah Phillips, partner at Irwin Mitchell, says: “Mitigating tax to protect the amount of wealth that remains within the family unit, helping the next generation when they need it (rather than them inheriting at an unknown point in the future) or testing the financial responsibility of the next generation are all popular reasons [for intergenerational transfers].”

Ms Phillips says when passing wealth from baby boomers to younger clients, there are a few things to consider: 

• Does the wealth being gifted need protecting in the hands of the younger recipient (in the event of divorce, financial difficulties or third-party influences)?

• If clients help some of their children more than others during their lifetime but have a wish to ultimately treat them all equally, are their wills structured to achieve this?

• Intergenerational wealth transfers give many tax planning opportunities for both parties, but there are also many traps for the unwary or ill advised.

How financial advice can help the next generation

Liz Palmer, partner and head of private wealth at Howard Kennedy, says environmental, social and governance investing should be a core focus in intergenerational wealth transfers. 

She says: “The investment community’s interest in ESG issues is reaching a tipping point and that is because millennials in particular are forcing this up the agenda. If you want to advise the inheritors and have a relationship with them, then you need to prioritise these issues.”

She adds: “[Advisers] need to understand what drives the next generation and what their priorities are. ESG investing is a good example of this.”

Most commentators stress the importance of familiarising children with financial advice from an early age. 

Mr Pennington says: “Often we encourage family members and their advisers to have roundtable discussions. The roundtable style of meeting helps clients to identify their own preferences and it allows for different generations to gain knowledge and understanding of the family’s position.”